Question

Mason industries are trying to determine if it makes sense to use their line of credit to pay some vendor invoices that offer a 2% cash discount. The annual interest rate on their line of credit is 9%. If they used $10,000 of their line of credit to pay the vendor invoices, how much would they save if they repaid the balance on their line of credit in one month?

Answer 1

Mason Industries would lose $700 if they used their line of credit to pay vendor invoices with a 2% cash discount and repaid the balance in one month.

Step-by-step explanation:

To determine if it makes sense to use their line of credit to pay vendor invoices with a 2% cash discount, Mason Industries should compare the savings from the discount to the cost of using their line of credit. By using the line of credit, they would save 2% of $10,000, which is $200. However, if they were to repay the balance on their line of credit in one month, the interest cost would be 9% of $10,000, which is $900.

Therefore, if they choose to use their line of credit, they would actually lose $700 ($900 - $200) instead of saving money. It would not make financial sense to use the line of credit in this scenario.