Answer to Question #229010 in Finance for HMO

Question

Eggs Ltd., an egg producing farm, requires short term financing and are

consulting with you for advice on which financing option to choose to fund its

purchases of feed for its hens. An operations consultant determined that the

standard deviation of feed use on a monthly basis is 33%, with January feed use

being the lowest at 1 ton and November being the highest at 2 tons. The farm

manager has found two options, a revolving credit facility at a rate of 5% per

annum with interest payable on the balance of the facility at the end of every

month OR a one- year renewable loan at a rate of 4% payable as part of the

monthly repayments on the loan.

Which loan would you advise the company to take?

(No calculations are required in this answer, though they are permissible.

Staff your answer with a brief argument for the option you reccomend)

Answer 1

 Revolving credit facility at a rate of 5% per annum.

This is because it will allow the company to pay interest only for the amount of credit availed leading to much lower interest cost due to lower feed requirement.