[Anonymous]

NINJA Question –

I am calculating a finance cost of 35.46% for Bandy Co, while the provided answer says it is 24.4%. Which is right?

Thanks for your help.

---

Three suppliers offer Ruby Co. different credit terms. Bandy Co. offers terms of 1.5/15, net 30. Carryl Co. offers terms of 1/10, net 30. Platt Co. offers terms of 2/10, net 60. Ruby Co. would have to borrow from a bank at an annual rate of 10% to take any cash discounts. Based on a 360-day year, which of the following options would be most attractive for Ruby Co.?

A.

Purchase from Platt Co., pay in 60 days, and do not borrow from the bank

Correct B.

Purchase from Bandy Co., pay in 15 days, and borrow from the bank

C.

Purchase from Carryl Co., pay in 10 days, and borrow from the bank

D.

Purchase from Bandy Co., pay in 30 days, and do not borrow from the bank

ANSWER:

The return percentage from taking a discount equals

360 X Percentage of Discount

Total Credit Perid – Discount Period 100% – Percentage of DIscount

Return percentage for Bandy Co is 24.4%

360 X 1.5%

30-15 100%-1.5%

Return percentage for Carryl Co is 18.2%

360 X 1%

30-10 100%-1%

Return percentage for Platt Co is 14.7%

360 X 2

60-10 98

Ruby Co. should purchase from Bandy Co. and borrow to take advantage of the discount. The return percentage of 24.4% significantly exceeds the 10% interest rate on the bank loan.