Noddings Inc.needs to raise more capital because its business is booming.The company purchases supplies on terms of 1/10 net 20, and it currently takes the discount.One way of getting the needed funds would be to forgo the discount, and the firm's owner believes she could delay payment to 40 days without adverse effects.What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.)

Question

Quizplus · Accepted Answer

The effective annual percentage cost of forgoing the discount can be calculated using the formula: (Discount % / (1 - Discount %)) * (365 / (Payment Days - Discount Days)). Substituting the given values: (1% / (1 - 1%)) * (365 / (40 - 10)) = 13.01%.