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Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing equipment to Landcaster's of Australia. Because the two companies have never done business with each other, Cypress requires a banker's acceptance as payment for the $1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Cypress Inc. chooses to discount or sell the banker's acceptance to its bank, the discount rate is 1.00% per annum.
-Refer to Instruction 16.1. What is the size of the discount (not including the commission fee) Cypress must take for receiving the proceeds of the sale today rather than waiting for six months?

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Quizplus · Accepted Answer

The discount size is calculated using the formula for simple interest: $ \text{Discount} = \text{Principal} \times \text{Rate} \times \text{Time} $. Here, the principal is $1,000,000, the annual discount rate is 1.00%, and the time is 6 months (or 0.5 years). Thus, the discount is $ $1,000,000 \times 0.01 \times 0.5 = $5,000 $.

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