Affleck Inc.\'s business is booming, and it needs to raise more capital. The com

Question

Affleck Inc.'s business is booming, and it needs to raise more capital. The company purchases supplies on terms of 1/10, net 20, and it currently takes the discount. One way of acquiring the needed funds would be to forgo the discount, and the firm's owner believes she could delay payment to 40 days without adverse effects. What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.

a) -26.6 days            b) -29.5 days          c) -40.5 days          d) -32.8 days          e) -36.4 days

Explanation / Answer

EAR = (1+ / (1- discount%)) (365 / (Actual days- discount period ) - 1

Discount = 1%, Net days 20

Discount days 10, Actual days to payment 40

=1/(1-0.01)(365/(40days-10days) - 1

=(1.0101)12.1667 - 1

=1.1301 -1

= 0.1301 or 13.01%

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