A City Has Two Sources to Borrow $200,000

question 6

Multiple Choice

A city has two sources to borrow $200,000.The first source is to borrow at j₁ = 9% and amortize the debt for 10 years with annual payments of $31,164.For the second source,the money can be borrowed at j₁ = 8% if the interest is paid annually and the principal is repaid in a lump sum at the end of 10 years.Assume that a sinking fund can earn money at j₁ = x%.At which of the following values of × will the second source be cheaper?
(a) 7% (b) 6% (c) 5%

• A)7% only
• B)6% and 7%
• C)5%,6% and 7%
• D)None of them

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Definitions:

Average Collection Period

The average number of days it takes for a company to receive payments owed by its customers, indicating the efficiency of a company's credit and collection policies.

Net Float

The difference between checks written against and deposited in an account, not yet cleared by the financial institution.

Cash Inflows

Money received by a business from its various activities, including sales, financing, and investments, contributing to its net cash flow.

Lockbox Systems

A service offered by banks to companies for the receipt of payment from customers, involving the use of specially designed lockboxes to speed up collections.