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Cost of Giving up Cash Discount Assignment

Author:
February 18th, 2020

2. (21%) Use 4 decimals to calculate and present your answers as xx.xx%

ABC Corporation purchased a new machine for $ 500,000 on credit. The supplier has offered the payment terms of 3/10, net 60. The current interest rate the bank is offering is 20 percent.

a. Compute the cost of giving up cash discount.

b. Should the firm take or give up the cash discount?

c. What is the effective rate of interest if the firm decides to take the cash discount by borrowing money on a discount basis?

3 (21%) AAA Supply is considering a 180-day short term borrowing of $100,000 and is in the process of negotiating with two local banks. The prime rate is currently 8 percent. The terms follow:

Bank A : a fixed rate over the 180 days at 2% above the prime rate

Bank B: Offers a floating-rate note over the 180 days period. Initially, the rate will be 8.5% for the first 90 days, then the rate drops to 8% for another 60 days. In the last 30 days, the rate drops to 7%.

(a) Calculate the effective interest rate of Bank A

(b) Calculate the effective interest rate of Bank B

(c) Recommend which bank AAA should choose. Get Finance homework help today

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