Slipshod Machine Tool Co. owes $55,000 to one of its suppliers. The supplier has

Question

Slipshod Machine Tool Co. owes $55,000 to one of its suppliers. The supplier has offered a trade discount of 2/10 net 30. Slipshod can borrow the funds from either of two banks: First City Bank will loan the funds for 20 days at a cost of $500; Upstart Bank offers a discounted loan for 20 days at a cost of $375.

a) What is the cost of failing to take the discount? (4 points)

b) What is the effective interest rate on each of the loans? (4 points)

c) Should Slipshod take the cash discount? (2 points)

d) Which bank loan should Slipshod use? Please explain (1 points)

Explanation / Answer

(a) Cost of giving up cash discount

=(.02^.98)*(360/(30-10))=38.93%

(b) Firct City : Int = Amount*Rate*(20/360)

SO Rate = Int/(amount*(20/360) = 500/(55000*20/360)

= 16.36%

Upstart Bank: Int = Amount*Rate*(20/360)

SO Rate = Int/(amount*(20/360) = 375/(55000*20/360)

= 12.27%

(c) As effective cost of taking a loan is Less than cost of giving up cash Disc, Slipshod should take Loan

(d) Slipsjod should take loan from Upstart bank as its Int rate is lower at 12.27%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

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