Neveready Flashlights Inc. needs $351,000 to take a cash discount of 3/18, net 7
ID: 2808254 • Letter: N
Question
Neveready Flashlights Inc. needs $351,000 to take a cash discount of 3/18, net 75. A banker will loan the money for 57 days at an interest cost of $12,200.
a. What is the effective rate on the bank loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
b. How much would it cost (in percentage terms) if the firm did not take the cash discount but paid the bill in 75 days instead of 18 days? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
c. Should the firm borrow the money to take the discount?
. What would be the effective interest rate in part d if the interest charge for 57 days were $7,200? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Explanation / Answer
a). Effective rate of interest = (Interest / Principal) × (Days in year / Days loan is outstanding)
= ($12,200 / $351,000) × (360 / 57)
= 0.2195, or 21.95%
b). Cost of lost discount = [3% / 97%] x [360 / (75 - 18)]
= 0.0309 x 6.3158 = 19.53%
c). No, because the cost of borrowing is more than the cost of losing the discount.
Can't solve the last part as the part 'd' is not given.
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