Simmons Corp can borrow from its bank at 17 percent to take

Simmons Corp. can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 1.5/13, net 55 a. Compute the cost of not taking the cash discount. (Use a 360-day year. Do not round intermediate calculations. Input your final answer as a percent rounded to 2 decimal places.) Cost of not taking a cash discount

Solution

Discount rate = 1.5% = 0.015

Discount period = 13 days

Due date = 55 days

Cost of not taking the discount = Discount rate/(1-Discount rate) * 360 days / (Due date-Discount period)

Cost of not taking the discount = 0.015/(1-0.015) * 360 days/(55 days-13 days)

Cost of not taking the discount = (0.015/0.985) * (360 days/42 days) = 0.015228*360 days/42 days = 0.1305

Hence, cost of not taking the discount is 13.05%