Inventory financing costs
Joan Sweatt comes to you for advice. She has just purchased a large amount of inventory with the terms 2/10, n/30. The amount of the invoice is $540,000. She is currently short of cash but has decent credit. She can borrow the money needed to settle the account payable at an annual interest rate of 7%. Joan is sure she will have the necessary cash by the due date of the invoice but not by the last day of the discount period.
Required
a.Convert the discount rate into an annual interest rate.
b. Make a recommendation regarding whether Sweatt should borrow the money and pay off the account payable within the discount period.
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