Question

Simple Simon's Bakery purchases supplies on terms of 1.7 /10, net 28. If Simple Simon's chooses to take the discount offered, it must obtain a bank loan to meet its short-term financing needs. A local bank has quoted Simple Simon's owner an interest rate of 10.2% on borrowed funds. Should Simple Simon's enter the loan agreement with the bank and begin taking the discount? (Use 365 days for a year.)

Answer 1

1.7/ 10 net 28 means that Simple will get 1.7 % discount if paid within 10 days or else the total amount is due in 28 days

So we assume the amount to be paid = $100 and we pay on the 10 th day out of 28 days

Discount = 100 *1.7% = $1.7

Value of loan = 100 - 1.7 = $98.3

Interest on the loan = 98.3 * 10.2% *18/365 = $0.4945

Total amount paid = 98.3 + 0.4945 = 98.7945

This is less than the purchase price of $100 hence Simple Simon's should enter the loan agreement with the bank and begin taking the discount