Harper Engine Company needs $631,000 to take a cash discount of 2.5/20, net 75. A banker will loan the money for 55 days at an interest cost of $13,300.
a. What is the effective rate on the bank loan?
b. How much would it cost (in percentage terms) if Harper did not take the cash discount, but paid the bill in 75 days instead of 20 days?
c. Should Harper borrow the money to take the discount?
d. If another banker requires a 10 percent compensating balance, how much must Harper borrow to end up with $631,000?
e. What would be the effective interest rate in part d if the interest charge for 55 days were $10,100? Should Harper borrow with the 10 percent compensating balance? (There are no funds to count against the compensating balance requirement.)