Final answer:
To calculate the cost of not taking the cash discount, one must find the annualized cost of forfeiting a 2% discount for an extra 75 days credit. The cost is found to be higher than the 6 percent interest for borrowing, indicating that Little Kimi Clothiers should borrow the money to take the cash discount.
Step-by-step explanation:
The student is asking about the cost of not taking a cash discount for Little Kimi Clothiers and whether the firm should borrow money from a bank to avail the discount. The cash discount being considered is 2/15 net 90, which translates to a 2% discount if the payment is made within the first 15 days instead of the regular 90 days term.
To calculate the cost of not taking the cash discount, we need to compute the annualized cost of giving up a 2% discount for the additional 75 days (90-15 days) of credit:
Discount not taken = 1 - 0.02 = 0.98
Daily cost = (1 / 0.98)^(365/75) - 1
Annualized cost = (Daily cost - 1) * 100
After performing the calculation, we find that the annualized cost is higher than the 6 percent interest rate the firm would incur to borrow the funds.
Given that the cost of not taking the cash discount is higher than the borrowing cost, the firm should indeed borrow the funds. The reduced price from the discount outweighs the interest expenses from the loan.