Bright Flashlight Company needs $300,000 to take a cash discount of 2/10, net 70. A bank will loan the money for 60 days at a total interest cost of $5,500.
a. What is the effective rate on the bank loan?
b. How much would it cost (as a percentage) if the company did not take the cash discount, but paid the bill in 70 days rather than 10 days?
c. Should the company borrow the money to take the discount?
d. If the banker requires a 20% compensating balance, how much must the firm borrow to end up with $300,000?
The solution calculates the cost of not taking a cash discount.