Question

Avatar Corp solves its cash shortage by paying its bills a week late but loses a 1% discount by doing so. This is equivalent to borrowing at an annual interest rate of:

Group of answer choices
A. 52.0%
B. 12.8%
C. 68.6%
D. 1.0%

Answer 1

The equivalent borrowing rate for Avatar Corp is 1%, which means they are effectively borrowing at an annual interest rate of 1%. Therefore correct option is D

Step-by-step explanation:

To calculate the equivalent borrowing rate, we need to consider the discount that Avatar Corp loses by paying its bills a week late. Since they lose a 1% discount, it means they are effectively paying 1% more than they would if they paid on time. This can be considered as an additional cost or interest on the amount they owe.

Therefore, the equivalent borrowing rate can be calculated as the annual interest rate that would result in a 1% increase in the amount owed. Let's denote this rate as 'r'. We can calculate it using the formula:

1. r = (1 + r) - 1
2. 0.01 = r - 1
3. 0.01 + 1 = r
4. 1.01 = r

So, the equivalent borrowing rate for Avatar Corp is 1.01, which is equal to 101% or 101% - 100% = 1%. Therefore, the correct answer is 1.0% (Option D).