Chapter & 1. The owner of a business has purchased inventory for $1000. He has t

Question

Chapter & 1. The owner of a business has purchased inventory for $1000. He has the choice to pay the total in 60 days or pay within 10 days and receive a 2% discount, which option is better assuming he can easly get a short-term loan for 10% a year. Please explain your answer and provide supporting calculations 2. Slipshod Machine Tool Co. owes $40,000 to one of its suppliers. He has four choices a) Slipshod can borrow from First City Bank will loan the funds for 20 days at a cost of $400 b) Slipshod can borrow from Gold Bank offers a discounted loan for 20 days at a cost of $350 c) Slipshod can borrow from Nice Bank an installment loan for one year, for total interest of $2,400, he will have to pay monthly installments d) Slipshod can borrow from Nice Bank an installment loan for one year, for total interest of $2,400, he will have to pay quarterly installments For options a and b, calculate the annual interest rate. For option C, calculate the effective annual interest rate

Explanation / Answer

Since, multiple questions have been posted and each question is independent of another, I have answered the first question.

______

Question 1:

We will have to calculate the cost of credit in order to take the decision as below:

Cost of Credit = Discount Percentage/(100% - Discount Percentage)*(360/Total Days Allowed for Payment - Discount Period)

Here, Discount Percentage = 2%, Total Days Allowed for Payment = 60 days and Discount Period = 10 days

Using these values in the above formula for Cost of Credit, we get,

Cost of Credit = 2%/(100% - 2%)*360/(60 - 10) = 14.69%

As the cost of credit (14.69%) is higher than the cost of short-term loan (10%), the owner should take the discount make the payment within 10 days.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.