Question

E3 Saved 7. Bill Norman comes to you for advice. He has just purchased a large amount of inventory with the terms 2/15, 1/30. The amount of the Invoice is $320,000. He is currently short of cash but has decent credit. He can borrow the money needed to settle the account payable at an annual interest rate of 8 percent. Bill is sure he will have the necessary cash by the due date of the invoice but not by the last day of the discount period. Required Convert the discount rate into an annual interest rate. (Use 365 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places. i.e., 2345 should be entered as 23.45).) b. Make a recommendation regarding whether Bill should borrow the money and pay off the account payable within the discount period 5 points eBook Print a Annual rate b Should Bil borrow the money and pay off the account payable within the discount period? References 7 III

Answer 1

a.         Annual rate = Discount rate x (365 days ÷ Discount term*)

            Annual rate = 2% x (365 ÷ 15)

            Annual rate = 48.67%

b.         Since the annualized discount rate (48.67%) is significantly higher than the cost of borrowing (8%) Norman should borrow the money and payoff the liability within the discount period.