The Pawlowski Supply Company needs to increase its working capital by Rs. 4.4 million. The following three financing alternatives are available (assume a 365 day year): i. Forgo cash discounts…

The Pawlowski Supply Company needs to increase its working capital by Rs. 4.4 million. The following three financing alternatives are available (assume a 365-day year):

i. Forgo cash discounts (granted on a basis of "3/10, net 30") and pay on the final due date. ii. Borrow Rs. 5 million from a bank at 15 percent interest, This alternative would necessitate maintaining a 12 percent compensating balance. iii. Issue Rs, 4.7 million of six-month commercial paper to net Rs. 4.4 million. Assume that new paper would be issued every six months. Commercial paper has no stipulated interest rate. It is sold at a discount, and the amount of the discount determines the interest cost to the issuer.

Assuming that the firm would prefer the flexibility of bank financing, provided the additional cost of this flexibility was no more than 2 percent per annum.

a. Calculate the annual percentage cost for each alternative. b. Which alternative should Pawlowski select? Why? c. What additional qualitative factor should Pawlowski consider before reaching a decision?