Question

Your firm sells for cash only, but it is thinking of offering credit, allowing customers 90 days to pay. Customers understand the time value of money, so they would all wait and pay on the 90th day. To carry these receivables, you would have to borrow funds from your bank at a nominal 10%, daily compounding based on a 360-day year. You want to increase your base prices by exactly enough to offset your bank interest cost. To the closest whole percentage point, by how much should you raise your product prices? Do not round intermediate calculations. Round your answer to the nearest whole number.

Answer 1

Answer: 3% to the closest whole percentage point.

Step-by-step explanation:

The bank interest cost is 10% based on 360 days.

Your firm needs funds for 90 days till the receivables comes in.

The relevant rate will be what the bank charges for 90 days;

= 10% * (90/360)

= 2.5%

= 3% to the closest whole percentage point.