posted by Kimmie on .
Can anyone explain to me how to use this formula?
Cost of failing to
take a cash discount
100 percent Discount percent
Final due date Discount period
I am trying to calculate Assume the proceeds from the loan with the compensating balance requirement will be used to take cash discounts. Disregard part b about installment payments. and us the loan costs from part a. If the terms of the cash discount are 2/10, net 60, should the firm borrow the funds to take the discount? I cannot understand how I am supposed to do this. The figures I am using come from the following:
The Watson Corporation is negotiating a loan from PNC Bank. The company needs to borrow $300,000.
The bank offers a rate of 7% with a 30% compensating balance requirement, or as an alternative, 10% with additional fees of $4,700 to cover the services the bank is providing. In either case, the rate on the loan is floating (changes as the prime interest rate changes), and the loan would be for one year