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Unformatted text preview: CASH D ISCOUNT 1. Compute the cost of not taking the following cash discounts. Cost of not taking = Discount % x 360 . a cash discount 100%  Disc. % Final due date – Discount period a. 2/10, net 40 Cost of not taking a cash discount = (2% / 100%  2%) x (360 / 40 10) Cost of not taking a cash discount = 2.04% x 12 Cost of not taking a cash discount = 24.48% b. 2/15, net 30 Cost of not taking a cash discount = (2% / 100%  2%) x (360 / 30 15) Cost of not taking a cash discount = 2.04% x 24 Cost of not taking a cash discount = 48.96% c. 2/10, net 45 Cost of not taking a cash discount = (2% / 100%  2%) x (360 / 45 10) Cost of not taking a cash discount = 2.04% x 10.29 Cost of not taking a cash discount = 20.99% d. 3/10, net 90 Cost of not taking a cash discount = (3% / 100%  3%) x (360 / 90 10) Cost of not taking a cash discount = 3.09% x 4.50 Cost of not taking a cash discount = 13.91% 2. Delilah’s Haircuts can borrow from its bank at 13 percent to take a cash discount. The terms of the cash discount are 2/15, net 55. Should the firm borrow the funds? Cost of not taking = Discount % x 360 . a cash discount 100%  Disc. % Final due date – Discount period Cost of not taking a cash discount = (2% / 100%  2%) x (360 / 55 – 15) Cost of not taking a cash discount = 2.04% x 9 Cost of not taking a cash discount = 18.36% The cost of not taking the cash discount is greater than the cost of the loan (18.36% vs. 13%). The firm should borrow the money and take the cash discount. EFFECT IVE RATE OF I N TEREST 1. Your bank will lend you $4,000 for 45 days at a cost of $50 interest. What is your effective rate of interest? Effective rate = I nterest x Days in the year (360) Principal Days loan is outstanding Effective rate = ($50 / $4,000) x (360 / 45) Effective rate = 1.25% x 8 Effective rate = 10% 2. Your bank will lend you $3,000 for 50 days at a cost of $45 interest. What is your effective rate of interest? Effective rate = I nterest x Days in the year (360) Principal Days loan is outstanding Effective rate = ($45 / $3,000) x (360 / 50) Effective rate = 1.5% x 7.2 Effective rate = 10.80% 3. I.M. Boring borrows $5,000 for one year at 13 percent interest. What is the effective rate of interest if the loan is discounted? Effective rate = Interest x Days in the year (360) on a discount loan Principal  I nterest Days loan is outstanding Effective rate on a discount loan = ($650 / $5,000  $650) x (360 / 360) Effective rate on a discount loan = ($650 / $4,350) x 1 Effective rate on a discount loan = 14.94% 4. Ida Kline borrows $8,000 for 90 days and pays $180 interest. What is the effective rate of interest if the loan is discounted? Effective rate = Interest x Days in the year (360) on a discount loan Principal  I nterest Days loan is outstanding Effective rate on a discount loan = ($180 / $8,000  $180) x (360 / 90) Effective rate on a discount loan = ($180 / $7,820) x 4 Effective rate on a discount loan = 2.30% x 4 Effective rate on a discount loan...
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 Spring '11
 Berney
 Interest

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