BollyIndia Enterprises has sold a combination of films and DVDs to Brazilia Media Incorporated for €1,000,000, with payment due in 3 months. BollyIndia Enterprises has the following alternatives for financing this receivable: (1) Use its bank credit line. Interest would be at the prime rate of 8% plus 250 basis points per annum. BollyIndia Enterprises would need to maintain a compensating balance of 20% of the loan’s face amount. No interest will be paid on the compensating balance by the bank. (2) Use its bank credit line but purchase export credit insurance for a 1% fee. Because of the reduced risk, the bank interest rate would be reduced to 5% per annum without any points a. What are the annualized percentage all-in-costs of each alternative?
b. What are the advantages and disadvantages of each alternative?
c. Which alternative would you recommend?