Parsons Company has a cash flow problem and owes suppliers $300,000 on credit te
ID: 2708413 • Letter: P
Question
Parsons Company has a cash flow problem and owes suppliers $300,000 on credit terms of 2/10 net 40. If Parsons does not have the cash, should it borrow $300,000 at an annual rate of 24% to take advantage of the discount?
No, additional borrowing will cost more for interest (60,000 per year) than the discount is worth
Yes, the effective cost of foregoing the disount is greater than 24%
No, the effective cost of foregoing the discount is equal to 24% and there are no transactions costs associated with borrowing
it does not matter because the present value of the cost of borrowing is exactly equal to the amount of the discount for paying within 10 days
No, additional borrowing will cost more for interest (60,000 per year) than the discount is worth
Yes, the effective cost of foregoing the disount is greater than 24%
No, the effective cost of foregoing the discount is equal to 24% and there are no transactions costs associated with borrowing
it does not matter because the present value of the cost of borrowing is exactly equal to the amount of the discount for paying within 10 days
Explanation / Answer
No, the effective cost of foregoing the discount is equal to 24% and there are no transactions costs associated with borrowing