Nichole Jordan comes to you for advice. She has just purchased a large amount of

Question

Nichole Jordan 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 $270,000. 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 percent. Nichole 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

Convert the discount rate into an annual interest rate. (Use 365 days in a year. Do not round your intermediate calculations. Round your answer to 2 decimal places. (i.e., .2345 should be entered as 23.45).)

Make a recommendation regarding whether Jordan should borrow the money and pay off the account payable within the discount period.

a.

Convert the discount rate into an annual interest rate. (Use 365 days in a year. Do not round your intermediate calculations. Round your answer to 2 decimal places. (i.e., .2345 should be entered as 23.45).)

Explanation / Answer

Thus, based on above analysis, it is better to pay within discount period and save $ 4,364.

Alternative-1 Alternaive-2 Avail Discount and pay on or before 10th day ($) Don't Avail discount and pay at the end of 30 day ($) Total Invoice Amount 2,70,000 2,70,000 Less: Discount @ 2% 5,400 -   Add: Interest @7% for 20 days 1,036 -   Net Cash Outflow 2,65,636 2,70,000

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