Your firm sells for cash only: but it is thinking of offering credit, allowing c

Question

Your firm sells for cash only: but it is thinking of offering credit, allowing customers 90 days to pay. Customers understand the time value of money, so they would all wait and pay on the 90th day. To carry these receivables, you would have to borrow funds from your bank at a nominal 12% daily compounding based on a 360-day year. You want to increase your base prices by exactly enough to offset your bank interest cost. To the closest whole percentage point, by how much should you raise your products prices?

Explanation / Answer

The price should be increased by 3% calcuated as below The outstanding will be for 90 days Interest is 12% for 360 days so the interest for 90 days will be = (90/360) X 12%. = (90/360) x 12 = 3%

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