Brand Advertising is offered a 3/10 net 40 trade discount by its supplier. In the past Brand has been able to ger away with paying for supplies on credit in 60 days. Since it doesn't have money on hand to take advantage of the discount, it tries to negotiate a loan with Portland State Bank. The amount of $400,000 with a 12% compensating balance and a $6,200 interest charge has been negotiated for the month of May . Brand already maintains a $16,250 balance at the bank. Compute the effective rate of interest on the loan, and the cost of not taking the discount. Should Brand take advantage of the cash discount?

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To determine the effective rate of interest on the loan and the cost of not taking the cash discount, we need to perform a few calculations. Let's break it down step by step:

1. Effective Rate of Interest on the loan:
a. Start by calculating the compensating balance. The compensating balance is the percentage of the loan amount that must be maintained in the bank.
Compensating Balance = Loan Amount * Compensating Balance Rate
Compensating Balance = $400,000 * 12% = $48,000

b. Calculate the Effective Loan Amount, which is the loan amount minus the compensating balance.
Effective Loan Amount = Loan Amount - Compensating Balance
Effective Loan Amount = $400,000 - $48,000 = $352,000

c. Calculate the Interest Charges. The interest charge is the interest paid on the loan.
Interest Charges = Effective Loan Amount * Interest Rate
Interest Charges = $352,000 * (12/100) = $42,240

d. Calculate the Effective Rate of Interest. The effective rate of interest is the interest charges divided by the effective loan amount, expressed as a percentage.
Effective Rate of Interest = (Interest Charges / Effective Loan Amount) * 100
Effective Rate of Interest = ($42,240 / $352,000) * 100 ≈ 12%

The effective rate of interest on the loan is approximately 12%.

2. Cost of not taking the cash discount:
a. Calculate the discount amount. The discount amount is the percentage of the invoice that Brand Advertising can save if paid within the discount period.
Discount Amount = Invoice Amount * Discount Rate
Discount Amount = Invoice Amount * (3/10)

b. Calculate the Net Amount due after the discount. The net amount due is the invoice amount minus the discount amount.
Net Amount Due = Invoice Amount - Discount Amount

c. Calculate the Annualized Interest Rate. The annualized interest rate is the cost of not taking the discount, expressed as a percentage for the 60-day period.
Annualized Interest Rate = (Discount Amount / (Net Amount Due * (60/40))) * 100

However, we are given that Brand Advertising has been paying in 60 days and not taking the discount, so the cost of not taking the discount is already factored into their past payment terms.

Therefore, the cost of not taking the discount is not applicable in this scenario.

Based on the calculations, the effective rate of interest on the loan is approximately 12%. Since the cost of not taking the discount is not applicable, Brand Advertising should carefully consider whether taking the cash discount is beneficial.