Question

Simple​ Simon's Bakery purchases supplies on terms of 1.9/10, net 29. 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 10.7 % 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.)

Simple​ Simon's can earn an effective rate of___​% ​(Round to one decimal​ place.)

Should Simple​ Simon's enter the loan agreement with the bank and begin taking the​ discount? ​ (Select the best choice​ below.)

A.Simple​ Simon's will earn 44.6 % on its purchases by paying within the discount period and should enter into the loan agreement.

B.Simple​ Simon's will earn 27.3 % on its purchases by paying within the discount period and should enter into the loan agreement.

C.The discount rate of 1.9 % is considerably lower than the 10.7 % interest​ rate, so Simple​ Simon's should not enter into the loan agreement.

D.Need more information to answer the question.

Answer 1

Interest rate on use of credit provided by supplier	1.9%/(100%-1.9%)
Interest rate on use of credit provided by supplier	1.9%/98.1%
Interest rate on use of credit provided by supplier	1.94%
Loan period	(29-10)
Loan period	19
APR	(1.0194^(365/19)) - 1
APR	1.0194^19.2105 - 1
APR	44.6%
Thus, simple simon would earn 44.6% on its purchases if paid within discount period and should enter into loan agreement