a retailer has an account for 20000 from a manufacture who gives 2 months credit But offers a cash discount of 5% for prompt payment.The retailer borrows 20000 from his bank at 9% interest rate for 2 months and pays promptly to secure the cash discount.How much does she gain by this transaction
To calculate how much the retailer gains by availing the cash discount, we need to compare the interest paid on the loan with the cash discount received. Here's how you can calculate it:
1. Calculate the interest paid on the loan:
Loan amount = $20,000
Interest rate = 9% per annum
Time period = 2 months (which is 2/12 years)
Interest paid = Loan amount * Interest rate * Time period
= $20,000 * 9% * (2/12)
= $300
2. Calculate the cash discount:
Discount rate = 5% of the invoice amount ($20,000)
Cash discount = Discount rate * Invoice amount
= 5% * $20,000
= $1,000
3. Calculate the net gain:
Net gain = Cash discount - Interest paid
= $1,000 - $300
= $700
Therefore, the retailer gains $700 by availing the cash discount and paying promptly.