Question

Little Kimi Clothiers can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 3/19 net 90.

a. Compute the cost of not taking the cash discount. (Use 365 days in a year. Do not round the intermediate calculations. Round the final answer to 2 decimal places.)
Cost of not taking a cash discount %
b. Should the firm borrow the funds?
O Yes
O No
Your bank will lend you $6,000 for 45 days at a cost of $93 interest.
a. What is your annual rate of interest? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.) Annual rate of interest %
b. What is your effective annual rate? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.) Effective annual rate %

Answer 1

The cost of not taking the cash discount for Little Kimi Clothiers is 19.05%. The annual rate of interest for the bank loan is 14.50% and the effective annual rate is 15.19%.

Step-by-step explanation:

The cost of not taking the cash discount can be calculated using the formula: Discount % / (100% - Discount %) * (365 / (Payment period - Discount period)). In this case, the discount % is 3/19, the payment period is 90 days, and the discount period is 19 days. Plugging these values into the formula, we get:

The cost of not taking the cash discount % = (3/19) / (1 - (3/19)) * (365 / (90 - 19)) = 19.05%.

Based on this calculation, Little Kimi Clothiers would need to pay an additional 19.05% on the amount if they choose not to take the cash discount. Regarding the second question, to calculate the annual rate of interest, divide the interest amount by the principal and multiply by 365/days. In this case, the interest amount is $93, the principal is $6,000, and the time period is 45 days. Plugging these values into the formula, we get:

The annual rate of interest % = ($93 / $6,000) * (365 / 45) = 14.50%.

To calculate the effective annual rate, use the formula: (1 + (Annual rate of interest / 100)) ^ (365 / days) - 1. In this case, the annual rate of interest is 14.50% and the time period is 45 days. Plugging these values into the formula, we get:

Effective annual rate % = (1 + (14.50% / 100)) ^ (365 / 45) - 1 = 15.19%.