Question

Simple Simon's Bakery purchases supplies on terms of 1/10, Net 25. If Simple Simon's chooses to take the discount offered, it must obtain a bank loan to meet its short-term financing needs. A local bank has quoted Simple Simon's owner an interest rate of 12% on borrowed funds and no origination fees. Should Simple Simon's enter the loan agreement with the bank in order to begin taking the discount? Yes, because the trade credit is cheaper No, because 12% isn't a high enough return for Simple Simon's Yes, because the bank loan is cheaper than their trade credit No, because the bank loan is more expensive than their trade credit

Answer 1

Cost of trade credit if the discount is not taken:-

=(1/99)*(365/15) =25%

The answer is: Yes because the bank loan is cheaper than their trade credit.