Question

Harper Engine Company needs $638,000 to take a cash discount of 1.50/15, net 65. A banker will loan the money for 50 days at an interest cost of $16,800.

a. What is the effective rate on the bank loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

b. How much would it cost (in percentage terms) if Harper did not take the cash discount but paid the bill in 65 days instead of 15 days? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.

c. Should Harper borrow the money to take the discount? No Yes

d. If another banker requires a 10 percent compensating balance, how much must Harper borrow to end up with $638,000? (Round your answer to 2 decimal places.)

e-1. What would be the effective interest rate in part d if the interest charge for 50 days were $14,400? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

e-2. Should Harper borrow with the 10 percent compensating balance requirement? (There are no funds to count against the compensating balance requirement.) No Yes

Answer 1

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