You are in need of regular short term financing to support your business. Three options appear attractive: 1. A standard line of credit in the sum of $500,000 at 18% annual interest for the funds used. You have between $75,000 and $1000,000 in cash coming in in a typical month, and usual monthly expenses of $80,000. At the start of the loan period, you have $120,000 in accounts payable. 2. Your bank is also offering a $1,000,000 5 year loan at 12%, and a requirement to keep $150,000 of that loan in your bank account at all times. You only need to pay the interest each moth, and pay off the million dollar principal at the end of the loan. You have the same revenue and expense profile given above. 3. A factor is also willing to buy your accounts receivable as they come in. They will buy 90% of your receivables at an 80% of fave value. All of your revenue is business-to-business and therefore starts life as A/R. Your customers currently pay on average within 60 days, which the factor knows and expects. Which offer gives you the money you need on an ongoing basis at the lowest cost to the company?
You are in need of regular short term financing to support your business. Three options appear attractive: 1. A standard line of credit in the sum of $500,000 at 18% annual interest for the funds used. You have between $75,000 and $1000,000 in cash coming in in a typical month, and usual monthly expenses of $80,000. At the start of the loan period, you have $120,000 in accounts payable. 2. Your bank is also offering a $1,000,000 5 year loan at 12%, and a requirement to keep $150,000 of that loan in your bank account at all times. You only need to pay the interest each moth, and pay off the million dollar principal at the end of the loan. You have the same revenue and expense profile given above. 3. A factor is also willing to buy your accounts receivable as they come in. They will buy 90% of your receivables at an 80% of fave value. All of your revenue is business-to-business and therefore starts life as A/R. Your customers currently pay on average within 60 days, which the factor knows and expects. Which offer gives you the money you need on an ongoing basis at the lowest cost to the company?
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 3PB: Use the tables in Appendix B to answer the following questions. A. If you would like to accumulate...
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Transcribed Image Text:You are in need of regular short term financing to support your business. Three options appear attractive:
1. A standard line of credit in the sum of $500,000 at 18% annual interest for the funds used. You have between
$75,000 and $1000,000 in cash coming in in a typical month, and usual monthly expenses of $80,000. At the start of
the loan period, you have $120,000 in accounts payable.
2. Your bank is also offering a $1,000,000 5 year loan at 12%, and a requirement to keep $150,000 of that loan in your
bank account at all times. You only need to pay the interest each moth, and pay off the million dollar principal at the
end of the loan. You have the same revenue and expense profile given above.
3. A factor is also willing to buy your accounts receivable as they come in. They will buy 90% of your receivables at an
80% of fave value. All of your revenue is business-to-business and therefore starts life as A/R. Your customers
currently pay on average within 60 days, which the factor knows and expects.
Which offer gives you the money you need on an ongoing basis at the lowest cost to the company?
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