Question

Your firm sells for cash only, but it is thinking of offering credit, allowing customers 90 days to pay. Customers understand the time value of money, so they would all wait and pay on the 90th day. To carry these receivables, you would have to borrow funds from your bank at a nominal 10%, daily compounding based on a 360-day year. You want to increase your base prices by exactly enough to offset your bank interest cost. To the closest whole percentage point, by how much should you raise your product prices? Do not round intermediate calculations. Round your answer to the nearest whole number.

Answer 1

In this case -

Let the cost of item is 100 $

Rate of compounding is 10%

Compounding interval is Daily

Total interval of payment is 90 days .

So future value after calculating using the attached formulae comes out to be 2.53 $

Which is exactly 2.53% of 100$

So the % increase in base value to cover the interest rate is (2.53/100 ) *100 = 2.53% increase in base value .