Modern Printing Press estimates that it will need an additional Rs 500,000 for the month of June due to the seasonal nature of its business. It has three options available to provide the needed funds:
a. Establish a one-year line of credit for Rs 500,000 with a commercial bank. The commitment fee would be 1 percent, and the interest charged would be 12 percent per annum on the used funds. No minimum time on the use of the money.
b. Forego the June trade discount of 2/10, net 40 on Rs 500,000 of accounts payable.
c. Issue Rs 500,000 of sixty-day commercial paper at a 9 percent per annum interest rate. Since the funds are only required for only 30 days, the excess funds are invested in 6 percent per annum marketable securities for the month of July. The total transaction fee on purchasing and selling the marketable securities is 0.5 percent of the fair market value
i. Calculate rupees cost of each alternative. Which alternatives result in the lowest rupees cost?
ii. Is the source with the lowest expected cost necessarily the source to select? Why or why not?
