The Masson Corporation needs to raise $500,000 for one year to supply working capital to a new store. Masson buys from its suppliers on terms of 3/10, net 90, and it currently pays on the 10th day and takes discounts, but it could forgo discounts, pay on the 90th day, and get the needed $500,000 in the form of costly trade credit. Alternative, Masson could borrow from its bank on a 12% discount interest rate basis.
a. What is the effective annual interest rate of forgoing discounts?
b. What is the effective annual interest of the bank loan?
- Please show your work and explain how you get the answers with cash flows method and how we do it using the financial calculator.
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