Simple Simon\'s Bakery purchases supplies on terms of 1.6 divided by 10 comma ne

Question

Simple Simon's Bakery purchases supplies on terms of 1.6 divided by 10 comma net 261.6/10, net 26.

If Simple Simon's chooses to take the discount offered, it must obtain a bank loan to meet its short-term financing needs. A local bank has quoted SimpleSimon's owner an interest rate of 11.6% on borrowed funds. Should Simple Simon's enter the loan agreement with the bank and begin taking the discount? (Use 365 days for a year.)

Simple Simon's can earn an effective rate of ____%. (Round to one decimal place.)

Should Simple Simon's enter the loan agreement with the bank and begin taking the discount? (Select the best choice below.)

A. Simple Simon's will earn 44.5 % on its purchases by paying within the discount period and should enter into the loan agreement.

B. Simple Simon's will earn 25.4% on its purchases by paying within the discount period and should enter into the loan agreement.

C. The discount rate of 1.6% is considerably lower than the 11.6% interest rate, so Simple Simon's should not enter into the loan agreement.

D. Need more information to answer the question.

Explanation / Answer

Annual credit cost ac=365/(26-10)*(1.6%/(100%-1.6%))=37.0935%
Simple Simon's will earn 25.4% on its purchases by paying within the discount period and should enter into the loan agreement.

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