Question

Bill Norman comes to you for advice. He has just purchased a large amount of inventory with the terms 2/10, n/30. The amount of the invoice is $310,000. 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 7 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).) Make a recommendation regarding whether Norman should borrow the money and pay off the account payable within the discount period.

Answer 1

Solution:

Annual Discount percentage - Formula Discount %/(100-Discount %) < (360/Allowed payment days - Discount days) 365 Discount % 2% 100-2% 98.00% Allowed Payment Days 30 Discount Days 10 Annual Discount Percentage 37.24%

Cost of giving up the dicount is 37.24%, whereas tha cost of borrowing is 7%, hence Norman should borrow the money and pay off the account payable within the discount period.

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