Adams Manufacturing Inc. buys $9.8 million of materials (net of discounts) on te

Question

Adams Manufacturing Inc. buys $9.8 million of materials (net of discounts) on terms of 2/10, net 50; and it currently pays after 10 days and takes the discounts. Adams plans to expand, which will require additional financing. If Adams decides to forgo discounts, how much additional credit could it obtain? Round your answer to the nearest cent. Do not round your intermediate calculations. Use 365 day in a year.
$  

What would be the nominal and effective cost of such a credit? Round your answer to 2 decimal places. Do not round intermediate calculations. Use 365 day in a year.
Nominal cost: %
Effective cost: %

If the company could receive the funds from a bank at a rate of 9.05%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Round your answer to 2 decimal places. Do not round intermediate calculations.
%

Explanation / Answer

a.The amount of discount = 2% of the total 9.8 million = 0.02*9,800,000 = 196,000

So the additonal funds it can borrow is 196,000 * 365/(50-10) = 1,788,500

b. The nominal cost of credit = 2/(100-2) * 365/40 = 0.1862 = 18.62%

The effective cost = (1+r/m)^m -1 = (1+0.1862/365)^365 - 1 = 20.46%

c. The effective cost of bank loan is (1+r/m)^m -1 where r = 9.05% = 0.0905 and m =12 since it is paid monthly So effective rate = (1+0.0905/12)^12 -1 = 9.43%

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