question archive 1) Neveready Flashlights, lnc, needs $ 300,000 to accept a cash discount of 2/10 days, net 70 days
1) Neveready Flashlights, lnc, needs $ 300,000 to accept a cash discount of 2/10 days, net 70 days
Subject:AccountingPrice:2.86 Bought3
1) Neveready Flashlights, lnc, needs $ 300,000 to accept a cash discount of 2/10 days, net 70 days. A banker will loan you the money for 60 days with interest of $ 5,500.
• What is the effective interest rate on the bank loan?
• How much would it cost you (in percentage terms) for the company not to take the prompt payment discount, and to pay the bill in 70 days instead of 10?
• Should Neveready Flashlights apply for the loan to take advantage of the discount?
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1) Effective Interest Rate = $5,500/ $300,000 * 360/ 60 = 1.83% * 6 = 10.98%
2) Cost of lost discount = 2% / 98% * 360 / (70-10) = 2.04% * 6 = 12.24%
3) Yes because the cost of borrowing is less than the cost of discount
