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Calculate the cost of not taking a cash discount

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Reference no: EM132503876

Question - The Reynolds Company buys from its suppliers on terms of 3/10, net 50. Reynolds has not been utilizing the discount offered and has been taking 60 days to pay its bills. The suppliers seem to accept this payment pattern, and Reynold's credit rating has not been hurt.

Mr. Duke, Reynolds Company's vice-president, has suggested that the company begin to take the discount offered. Mr. Duke proposes the company borrow from its bank at a stated rate of 18 percent. The bank requires a 12 percent compensating balance on these loans. Current account balances would not be available to meet any of this required compensating balance.

Required -

a. Calculate the cost of not taking a cash discount.

b. Calculate the annual rate of interest if the company borrows from the bank.

c. Do you agree with Mr. Duke's proposal?

Reference no: EM132503876

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