Neveready Flashlights Inc. needs $480,000 to take a cash discount of 2/10, net 70. A banker will loan the money for 60
days at an interest cost of $7,300.
a. What is the annual rate on the bank loan? (Use 365 days in a year. Do not round intermediate calculations. Round the
final answer to 2 decimal places.)
Annual rate
9.25%
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? (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
12.41%
c. Should the firm borrow the money to take the discount?
Yes
No
d. If the banker requires a 14 percent compensating balance, how much must the firm borrow to end up with the $480,000?
(Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)
Amount to be borrowed
$558139.5
e-1. What would be the effective interest rate in part d if the interest charge for 60 days were $10,300? (Use 365 days in a
year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)
Annual rate
12.82%
e-2. Should the firm borrow with the 19 percent compensating balance? (The firm has no funds to count against the
compensating balance requirement.)
