Question

A company is thinking of borrowing money at an 18% annual interest rate in order to pay a $30,000 invoice within the discount period. The invoice terms are 2/10, n/30. They should borrow the money because they will have a net savings of 19.2%. True or false?

Answer 1

Answer:

True

Explanation:

The annual interest rate correlated with the credit conditions is 37.2 per cent and is determined by multiplying the 20-day rate of interest ($600 - $29,400) by the amount of 20-day periods over a year (365-20).

18 per cent borrowing would save the company 19.2 per cent (37.2 per cent-18 per cent).

Answer 2

The statement that the company should consider borrowing the money because they have a net savings of 19.2% is TRUE.The company can continue to keep borrowing such funds.

The invoice terms as mentioned in the contract are 2/10, n/30 means that the will get discount of up to $600 on repayment with discounting such bill.

• The savings of the company can be calculated as the annual rate of the company contributes with the correlations to the credit conditions that match the 30-day interest period.

• The 2% interests will be calculated so in all the bill will be discounted to calculations as below,

• $\rm Total\ Discount\ = 0.02\ x\ 30000\\\\\\\\\rm Total\ Discount\ = 600$

• Thus the total interest charged will be discounted by $600 amounting to $29,400 in totality. The interests rate when multiplied by 2% over 30 periods of 20 day the bill interest comes down to 37.2%.

• $\rm Net\ Earnings=\ 0.372-0.18\\\\\\\rm Net\ Earnings=0.192$

• The company will be saving a total earning of 19.2%.

Hence, the company can continue to keep borrowing further amounts if its net earnings are 19.2%. So, the statement is TRUE.

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