Viking Farms harvests crops in roughly 90-day cycles based on a 360-day year.The firm receives payment from its harvests sometime after shipment.Due in part to the firm's rapid growth, it has been borrowing to finance its harvests using 90-day bank notes on which the firm pays 12 percent discount interest.If the firm requires R60,000 in proceeds from each note, what must be the face value of each note?

Question

Quizplus · Accepted Answer

The face value of the note is equal to the proceeds divided by the discount factor. The discount factor is 1 - (discount rate * time). In this case, the discount rate is 12% and the time is 90 days / 360 days = 0.25 years. Therefore, the discount factor is 1 - (0.12 * 0.25) = 0.88. The face value of the note is R60,000 / 0.88 = R68,182.

Viking Farms Harvests Crops in Roughly 90-Day Cycles Based on a 360-Day