Question

In: Finance

1). MMY Company purchased a new machine for RM1,000,000 on credit. The supplier has offered the...

1). MMY Company purchased a new machine for RM1,000,000 on credit. The supplier has offered the term of credit of 2/10, net 45. The current interest rate the bank is offering is 16 percent.

(a) Calculate the cost of not accepting cash discount.

(b) Should the firm take or give up the cash discount?

(c) What is the effective rate of interest if the firm decides to take the cash discount by borrowing money on a discount basis?

Solutions

Expert Solution

Based on the given data, pls find below workings:

(a) Calculate the cost of not accepting cash discount. By not accepting the cash discount, the firm is able to save the cost of 4.86%

(b) Should the firm take or give up the cash discount? No, Since the cost of cash discount is higher than that of the loan cost, the firm should give up the cash discount.

(c) What is the effective rate of interest if the firm decides to take the cash discount by borrowing money on a discount basis? The effetive rate thru cash discount is 20.86%

jeff jeffy answered 2 years ago
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