Question

Bill Norman comes to you for advice. He has just purchased a large amount of Inventory with the terms 3/20, 1/60. The amount of the Involce is $330,000. 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 11 percent. Bill is sure he will have the necessary cash by the due date of the involce but not by the last day of the discount period. Required a. 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. (L., 2345 should be entered us 23.45).) b. Make a recommendation regarding whether Norman should borrow the money and pay off the account payable within the discount period. Answer is complete but not entirely correct. 11.00 % Annual rate Should Norman borrow the money and pay off the account payable within the discount period? b Yes

Answer 1

Ans :- Periodic discount rate (p) = 3%

No of periods (m) = 365 / 20 = 18.25

Annual interest rate = P×M = 3 × 18.25 = 54.75%

Solution:-

a) If bill make the payment immediately then the amount he need to borrow = $( 330000×97%) = $320100

Amount of payment he need to make at end of 60 days along with the interest on borrowing

= $ 320100+ 320100×11%×60/365 Days

= $325888.10

b) If he don't borrow and make payment on due date, then the amount of outflow

=$330000