Question

The Reynolds Company buys from its suppliers on terms of 4/10, net 64. Reynolds has not been utilizing the discount offered and has
been taking 76 days to pay its bills. The suppliers seem to accept this payment pattern, and Reynold's credit rating has not been hurt.
Mr. Duke, Reynolds Company's vice-president, has suggested that the company begin to take the discount offered. Mr. Duke proposes
the company borrow from its bank at a stated rate of 18 percent. The bank requires a 12 percent compensating balance on these
loans. Current account balances would not be available to meet any of this required compensating balance.

Calculate the cost of not taking a cash discount. (Use 365 days in a year. Do not round intermediate calculations. Round the final
answer to 2 decimal places.)
Cost of not taking a cash discount

Answer 1

Answer: 23.04%

Explanation:

Based on the information given in the question, the cost of not taking a cash discount will be calculated as:

= D/(1-D) × (360/n)

where D = Discount rate

n = number of days after the discounted period

= D/(1-D) × (360/n)

= 4%/(1 - 4%) × [365/(76-10)]

= 4%/96% × (365/66)

= 0.0416667 × 5.530303

= 0.2304295

= 23.04%