Question

Q48 Simpson Conglomerates borrows $12,000 for a short-term purpose. The loan will be repaid after 120 days with Simpson paying $12,400. What is the approximate cost of credit using the APR, or annual percentage rate calculation? A) 3.33% B) 4.00% C) 10.00% D) 11.75% As a company accounts payable manager, which of the following credit terms are most likely to entice you to take the cash discount? A) 1/10 net 45 B) 2/10 net 60 C) 1/10 net 30 D) 2/10 net 90 Q49 Yeah! Answering this question is the last thing you have to do for Section 12 of BUS 170 A) True Q50 B) False

Answer 1

First 2 questions are being answered here.

1. Option (C) is correct

The formula for annual percentage rate is:

Annual percentage rate = ((Repayment amount - Principal amount) / Principal amount / n) * 12 * 100

where, n is the time period in months for which cost of credit is being offered. So here in this question, we have 120 days of credit, which means n will be (120 / 30) = 4

Repayment amount = $12400, Principal amount = $12000

Now, putting these values in above formula, we get, we get,

Annual percentage rate = (($12400 - $12000) / $12000) / 4) * 12 * 100

Annual percentage rate = ($400 / $12000) / 4) * 12 * 100

Annual percentage rate = (0.033333 / 4) * 1200

Annual percentage rate = 0.0083333333 * 1200

Annual percentage rate = 10%

2. Option (C) is correct

Here we will use the following formula to calculate the interest or cost of credit availed for all the credit terms. Since we are acting as accounts payables manager, so we will look for the terms which will give the highest interest or cost for availing credit. Because we will be saving more in the credit terms that give the highest interest or cost of availing the credit.The required formula is:

Cost of credit = Discount % * (100 % - Discount %) * (360 / (Full allowed payment days - Discount days)

We will now calculate the interest or cost of availing the credit for each credit term.

Cost of credit for terms

1 / 10 net 45

It means that there will be getting 1% discount if we pay within 10 days. And full allowed payment days are 45. Putting these values in the above formula, we get,

Cost of credit = 1% ( 100 % - 1%) * (360 / (45 - 10))

Cost of credit = (1% * 99%) * (360 / 35)

Cost of credit = 0.0099 * 10.28571

Cost of credit = 10.1828% or 0.101828

Cost of credit for 2 / 10 net 60 is:

It means that there will be getting 2% discount if we pay within 10 days. And full allowed payment days are 60. Putting these values in the above formula, we get,

Cost of credit = 2% ( 100 % - 2%) * (360 / (60 - 10))

Cost of credit = (2% * 98%) * (360 / 50)

Cost of credit = 0.0196 * 7.2

Cost of credit = 14.112% or 0.14112

Cost of credit for 1 / 10 net 30 is:

It means that there will be getting 1% discount if we pay within 10 days. And full allowed payment days are 30. Putting these values in the above formula, we get,

Cost of credit = 1% ( 100 % - 1%) * (360 / (30 - 10))

Cost of credit = (1% * 99%) * (360 / 20)

Cost of credit = 0.0099 * 18

Cost of credit = 17.82% or 0.1782

Cost of credit for 2 / 10 net 90 is:

It means that there will be getting 2% discount if we pay within 10 days. And full allowed payment days are 90. Putting these values in the above formula, we get,

Cost of credit = 2% ( 100 % - 2%) * (360 / (90 - 10))

Cost of credit = (2% * 98%) * (360 / 80)

Cost of credit = 0.0196% * 4.5

Cost of credit = 8.82% or 0.0882

We can see from the above that the rate of interest for availing the credit terms of 1 / 10 net 30 is highest among all the credit terms given. So we will use this credit term to take the cash discount.