The Reynolds Corporation buys from its suppliers on terms of 3/17, net 45. Reynolds has not been utilizing the discounts offered and has been taking 45 days to pay its bills.
Mr. Duke, Reynolds Corporation vice president has suggested that the company begin to take the discounts offered. Duke proposes that the company borrow from its bank at a stated rate of 16 percent. The bank requires a 27 percent compensating balance on these loans. Current account balances would not be available to meet any of these compensating balance requirements.
a. Calculate the cost of not taking a cash discount. (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
b. Calculate the effective rate of interest if the company borrows from the bank. (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
c. Do you agree with Duke's proposal?