Problem:
Neveready Flashlights, Inc., needs $300,000 to take a cash discount of 2/10, net 70. A banker will loan the money for 60 days at an interest cost of $5,500.
a. What is the effective rate on the bank loan?
b. How much would it cost (in percentage terms) if the firm did not take the cash discount, but paid the bill in 70 days instead of 10 days?
c. Should the firm borrow the money to take the discount?
d. If the banker requires a 20 percent compensating balance, how much must the firm borrow to end up with the $300,000?
e. What would be the effective interest rate in part d if the interest charge for 60 days were $6,850? Should the firm borrow with the 20 percent compensating balance? (The firm has no funds to count against the compensating balance requirement.)