question archive Ohio Valley Homecare Suppliers, Inc
Ohio Valley Homecare Suppliers, Inc
Subject:FinancePrice:2.86 Bought7
Ohio Valley Homecare Suppliers, Inc. (OVHS), had $20 million in sales in 2009. Its cost of goods sold was $8 million, and its average inventory balance was $2,000,000.
A) OVHS purchases goods from its supplier on terms of 3/15, Net 40. What is the effective annual cost to the firm if it chooses not to take the discount and makes its payment on day 40?
B) What is the effective annual cost to the firm if it chooses not to take the discount and makes its payment on day 50?
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A)
OVHS is paying $3 to borrow $97 for 25 days, (40 - 15).
The interest rate per period is 3/97 = 3.0927835%
The effective annual rate is (1.030927835)^(365/25) - 1 = 56.00%.
B)
Now OVHS is paying $3 to borrow $97 for 35 days, (50 - 15).
The interest rate per period is 3/97 = 3.0927835%
The effective annual rate is (1.030927835)^(365/35) - 1 = 37.39%.
