Question

The Reynolds Corporation buys from its suppliers on terms of 2/19, net 50. Reynolds has not been utilizing the discounts offered and has been taking 50 days to pay its bills. Ms. Duke, Reynolds Corporation's vice president, has suggested that the company begin to take the discounts offered. Duke proposes that the company borrow from its bank at a stated rate of 17 percent. The bank requires a 10 percent compensating balance on these loans. Current account balances would not be available to meet any of this compensating balance requirement. a. Calculate the cost of not taking a cash discount. (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Answer 1

23.68%

Explanation:

The computation of the cost of not taking a cash discount is shown below:-

Cost of not taking a cash discount = [Discount percentage ÷ (100% - Disc.%)] × (360 ÷ (Final due date - Discount period))

= (2% ÷ 98%) × (360 ÷ (50 - 19))

= 2.04% × 11.61

= 23.68%

Therefore for computing the cost of not taking a cash discount we simply applied the above formula.