Question

Simple? Simon's Bakery purchases supplies on terms of 1.5/10, net 30. 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 10.1 % on borrowed funds. Should Simple? Simon's enter the loan agreement with the bank and begin taking the? discount? (Hint: Use 365 days for a? year.)

The cost of forgoing the discount is _?_?%. ?(Round to one decimal? place.)

Answer 1

Cost of forgoing discount = [discount rate/(100-discount rate) ]* [365/(maximum days -discount days)]

                  =[1.5/(100-1.5)]*[ 365/ (30-10)]

                  = [1.5 / 98.5] *[365/20]

                  = .015228* 18.25

                  = .2779 or 27.79%

since the cost of forgoing discount is higher than cost on borrowed funds ( 10.1%) ,therefore simple simon should enter the loan agreement and begin taking discount .