Question

Simple​ Simon's Bakery purchases supplies on terms of 1.8 divided by 10 comma net 301.8/10, net 30. 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 Simple​ Simon's owner an interest rate of 10.7 %10.7% on borrowed funds. Should Simple​ Simon's enter the loan agreement with the bank and begin taking the​ discount?

Answer 1

Answer and Explanation:

The computation is shown below;

Here we have to determine the impact of not considering the discount

effective cost of not considering discount is

= ((1 + (r ÷ (1 - r))^(365 ÷ (due date - discount period)) - 1

= ((1  + (0.019 ÷ (1 - 0.019)))^(365 ÷ (30-10)))-1

= 39.30%

Since effective cost of not considering discount is more than the interest rate so the simon should entered into the loan agreement