Question

Return to question 13 Bill Norman comes to you for advice. He has just purchased a large amount of inventory with the terms 2/15, n/45. The amount of the invoice is $325,000. 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 12 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. 1.31 points 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. (i.e., .2345 should be entered as 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. a. 48.66 Annual rate Should Norman borrow the money and pay off the account payable within the discount period? b Yes

Answer 1

Solution a:

Annual rate of discount = ($325,000*2%) / ($325000 *98%)*365 / (45-15) = 24.83%

Solution b:

Should norman borrow the money and pay off the account payable with in the discount period = Yes