Question

Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing equipment to Landcaster's of Australia. Because the two companies have never done business with each other, Cypress requires a banker's acceptance as payment for the $1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Cypress Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum.What is the size of the discount (not including the commission fee) Cypress must take for receiving the proceeds of the sale today rather than waiting for six months? A $7,000 B $5,000 C $12,000 D $14.000

Answer 1

Answer:

B) $5,000

Explanation:

Cypress total bill is $1,000,000. Since a foreign bank is going to provide them a service (the acceptance of payment) it will charge them 1.4% per year or 0.7% for thee six month period.

That means that Cypress will collect $1,000,000 x (1 - 0.7%) = $993,000

If Cypress decides to sell the bankers acceptance at a 1% annual fee, he will lose an additional 0.5% for the 6 month period = $930,000 x 0.5% =  $4,965. Apparently we have to round to the nearest thousand ≈ $5,000