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Slipshod Machine Tool Co. owes $40,000 to one of its suppliers: effect of discount

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32. Slipshod Machine Tool Co. owes $40,000 to one of its suppliers. The supplier has offered a trade discount of 2/10 net 30. Slipshod can borrow the funds from either of two banks: First City Bank will loan the funds for 20 days at a cost of $400; Upstart Bank offers a discounted loan for 20 days at a cost of $320.

a) What is the cost of failing to take the discount?
b) What is the effective interest rate on each of the loans?
c) Which alternative should Slipshod follow?

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Solution Summary

The solution calculates the financial effects of the discount, and discusses the options.

Solution Preview

Please refer to the attachment.

a. What is the cost of failing to take the discount?

Cost of not taking a cash discount = Discount % x 360 ...

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