The R$.$ Morin Construction Company needs to borrow $$$$120,000$ to help finance the cost of a new $$$$180,000$ hydraulic crane used in the$$ firm's commercial construction business. The crane will pay for itself in one$$ year, and the firm is considering the following alternatives for financing its$$ purchase:

Alternative A$.$ The$$ firm's bank has agreed to lend the $$$$120,000$ at a rate of $14\%.$ Interest would be$$ discounted, and a $15\%$ compensating balance would be required.$$ However, the$$ compensating$-$balance requirement is not binding on the firm because it normally maintains a minimum demand deposit$($checking account$)$ balance of $$$$30,000$ in the bank.

Alternative B$.$ The equipment dealer has agreed to finance the equipment with a$1-$year loan. The $$$$120,000$ loan requires payment of principal and interest totaling $$$$139,332.$

a$.$ Which alternative should Morin$$ select?

b$.$ If the$$ bank's compensating$-$balance requirement had necessitated idle demand deposits equal to $15$ percent of the$$ loan, what effect would this have had on the cost of the bank loan$$ alternative?

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Part $1$

a$.$ The cost of Alternative A would be