Your firm sells for cash only, but it is thinking of offering credit, allowing c

Question

Your firm sells for cash only, but it is thinking of offering credit, allowing customers 90 days to pay. Customers understand the time value of money, so they would all wait and pay on the 90?th day. To carry these receivables, you would have to borrow funds from your bank at a nominal 6%, daily compounding based on a 360-day year. You want to increase your base prices by exactly enough to offset your bank interest cost. To the closest whole percentage point, by how much should you raise your product prices? Round your answer to the nearest hundredth at the end of the calculations.

Explanation / Answer

6% annual rate, compounding daily so (1+r)^n or (1+0.0001666667)^90= 1.015111795 - 1 = 1.5111795% 1.51% product price increase

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