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Calculate the cost of not taking a cash discount

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The Reynolds Company buys from its suppliers on terms of 3/10, net 65. Reynolds has not been utilizing the discount offered and has been taking 77 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 14 percent. The bank requires a 10 percent compensating balance on these loans. Current account balances would not be available to meet any of this required compensating balance.

a. Calculate the cost of not taking a cash discount. (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

b. Calculate the annual rate of interest if the company borrows from the bank. (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

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

Reference no: EM132789446

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