The Masson Corporation needs to raise $500,000 for one year to supply working ca
ID: 2783292 • Letter: T
Question
The Masson Corporation needs to raise $500,000 for one year to supply working capital to a new store. Masson buys from its suppliers on terms of 3/10, net 90, and it currently pays on the 10th day and takes discounts, but it could forgo discounts, pay on the 90th day, and get the needed $500,000 in the form of costly trade credit. Alternative, Masson could borrow from its bank on a 12% discount interest rate basis.
a. What is the effective annual interest rate of forgoing discounts?
b. What is the effective annual interest of the bank loan?
- Please show your work and explain how you get the answers with cash flows method and how we do it using the financial calculator.
Explanation / Answer
Answer(a)
=(3/97)*(365/(90-10)
=14.11 %
Answer b.
Discounted loans are loans that have the interest payment subtracted from the principal before the loan is disbursed.
Effective rate on a discounted loan = Interest/[Principal - Interest X Days in the Year (360)/Days Loan is Outstanding]
Effective rate on a discounted loan = $60,000/[$500,000 - $60,000 X 360/360] = 13.64 percent
The annualised cost of not taking the discount is computed as belowRelated Questions
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