You have been assigned by the CFO (as head of the Finance Department) to study and compare the loan-to-value (LTV) method and borrowing base (BB) method based on a total portfolio of $1,000,000 in A/R that Hospital ABC has agreed to pledged. Hospital ABC wants to borrow exactly $700,000. Hospital ABC needs your advice as to whether it should pledge its A/R to creditor MNO (which uses the LTV) or to creditor XYZ (which uses the BB method).

Calculate the maximum amount of loan that Hospital ABC can actually borrow from either creditor based on the following credit terms and conditions:

1. Creditor MNO (LTV method)

Hospital ABCs gross A/R portfolio: $1,000,000

Eligible A/R portfolio (as determined by MNO) $ 900.000

Hospital ABCs target loan amount: $ 700,000

Approved ratio by Creditor MNO: 0.80 LTV

Interest rate (prime+): 8.0 percent

2. Creditor XYZ (BB method)

Hospital ABCs gross A/R portfolio: $1,000,000

Ineligible A/R (due to aging determined by XYZ): $ 150,000

Hospital ABCs target loan amount: $ 700,000

Borrowing base percentage (approved by XYZ): 0.80

Reserves to be set aside by XYZ $ 22,500

Interest rate (prime+): 8.0 percent