Harper Engine Company needs $631,000 to take a cash discount of 2.5/20, net 75. A banker will lend 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.)

Question

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Answer 1

Textbook Question

Chapter 8, Problem 25P

Harper Engine Company needs $631,000 to take a cash discount of 2.5/20, net 75. A banker will lend 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.)

a.

Expert Solution

Summary Introduction

To calculate: The effective rate of interest for Harper Engine Company.

Introduction:

Effective rate:

Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific period of time.

Answer to Problem 25P

The effective rate of interest on the loan for Harper Engine Company is 13.82%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal×Days in the year (360)Days Loan is Outstanding=$13,300$631,000×36055=2.11%×6.55=13.82%

b.

Expert Solution

Summary Introduction

To calculate: The cost of the discount lost for Harper Engine Company.

Introduction:

Cash Discount:

Also known as early payment discount, it is given by the seller to procure early cash payments from customers.

Answer to Problem 25P

The cost of lost discount for Harper Engine Company is 16.77%.

Explanation of Solution

Calculation of the cost of not availing a cash discount:

Cost of lost Discount=Discount%100% - Discount%×360Final Due Date - Discount Period=2.50%100%−2.50%×36075−20=2.56%×6.55=16.77%

c.

Expert Solution

Summary Introduction

To calculate: Whether Harper Engine Company should borrow funds on the basis of the terms of the cash discount.

Introduction:

Cash Discount:

Also known as early payment discount, it is given by the seller to procure early cash payments from customers.

Effective interest rate

Also termed as annual equivalent rate, it is the rate to be charged on an investment and a loan over a specific period of time.

Answer to Problem 25P

Yes, the funds should be borrowed and the cash discount shall be availed by Harper Engine Company as the cost of taking the loan, that is, 13.82%, is lower than the cost of not taking the discount, that is, 16.77%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal×Days in the yearDays Loan is Outstanding=$13,300$631,000×36055=2.11%×6.55=13.82%

Calculation of the cost of not availing a cash discount:

Cost of lost Discount=Discount%100%−Discount%×360Final Due Date−Discount Period=2.50%100%−2.50%×36075−20=2.56%×6.55=16.77%

d.

Expert Solution

Summary Introduction

To calculate: The amount that Harper Engine Company should borrow to have $631,000.

Introduction:

Compensating Balance:

Also known as offsetting balance, it is the minimum balance that the borrowing company needs to maintain in its bank account. This benefits the lender by lowering their cost of lending.

Answer to Problem 25P

The amount to be borrowed by Harper Engine Company is $701,111.

Explanation of Solution

Calculation of the amount to be borrowed:

Amount to be Borrowed = Amount needed1−C=$631,0001−0.10=$631,0000.90=$701,111

e.

Expert Solution

Summary Introduction

To calculate: The effective rate of interest, and determine whether Harper Engine Company should borrow with a compensating balance of 10%.

Introduction:

Effective rate:

Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific period of time.

Compensating Balance:

Also known as offsetting balance, it is the minimum balance that the borrowing company needs to maintain in its bank account. This benefits the lender by lowering their cost of lending.

Answer to Problem 25P

The effective rate of interest is 10.48%.

Yes, the funds should be borrowed and the cash discount should be availed by Harper Engine Company as the cost of taking the loan, that is, 10.48%, is lower than the cost of not availing the discount, that is, 16.77%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal−Compensating Balance×Days in the yearDays Loan is Outstanding=$10,100$631,000×36055=1.60%×6.55=10.48%

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Answer 2

Textbook Question

Chapter 8, Problem 25P

Harper Engine Company needs $631,000 to take a cash discount of 2.5/20, net 75. A banker will lend 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.)

a.

Expert Solution

Summary Introduction

To calculate: The effective rate of interest for Harper Engine Company.

Introduction:

Effective rate:

Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific period of time.

Answer to Problem 25P

The effective rate of interest on the loan for Harper Engine Company is 13.82%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal×Days in the year (360)Days Loan is Outstanding=$13,300$631,000×36055=2.11%×6.55=13.82%

b.

Expert Solution

Summary Introduction

To calculate: The cost of the discount lost for Harper Engine Company.

Introduction:

Cash Discount:

Also known as early payment discount, it is given by the seller to procure early cash payments from customers.

Answer to Problem 25P

The cost of lost discount for Harper Engine Company is 16.77%.

Explanation of Solution

Calculation of the cost of not availing a cash discount:

Cost of lost Discount=Discount%100% - Discount%×360Final Due Date - Discount Period=2.50%100%−2.50%×36075−20=2.56%×6.55=16.77%

c.

Expert Solution

Summary Introduction

To calculate: Whether Harper Engine Company should borrow funds on the basis of the terms of the cash discount.

Introduction:

Cash Discount:

Also known as early payment discount, it is given by the seller to procure early cash payments from customers.

Effective interest rate

Also termed as annual equivalent rate, it is the rate to be charged on an investment and a loan over a specific period of time.

Answer to Problem 25P

Yes, the funds should be borrowed and the cash discount shall be availed by Harper Engine Company as the cost of taking the loan, that is, 13.82%, is lower than the cost of not taking the discount, that is, 16.77%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal×Days in the yearDays Loan is Outstanding=$13,300$631,000×36055=2.11%×6.55=13.82%

Calculation of the cost of not availing a cash discount:

Cost of lost Discount=Discount%100%−Discount%×360Final Due Date−Discount Period=2.50%100%−2.50%×36075−20=2.56%×6.55=16.77%

d.

Expert Solution

Summary Introduction

To calculate: The amount that Harper Engine Company should borrow to have $631,000.

Introduction:

Compensating Balance:

Also known as offsetting balance, it is the minimum balance that the borrowing company needs to maintain in its bank account. This benefits the lender by lowering their cost of lending.

Answer to Problem 25P

The amount to be borrowed by Harper Engine Company is $701,111.

Explanation of Solution

Calculation of the amount to be borrowed:

Amount to be Borrowed = Amount needed1−C=$631,0001−0.10=$631,0000.90=$701,111

e.

Expert Solution

Summary Introduction

To calculate: The effective rate of interest, and determine whether Harper Engine Company should borrow with a compensating balance of 10%.

Introduction:

Effective rate:

Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific period of time.

Compensating Balance:

Also known as offsetting balance, it is the minimum balance that the borrowing company needs to maintain in its bank account. This benefits the lender by lowering their cost of lending.

Answer to Problem 25P

The effective rate of interest is 10.48%.

Yes, the funds should be borrowed and the cash discount should be availed by Harper Engine Company as the cost of taking the loan, that is, 10.48%, is lower than the cost of not availing the discount, that is, 16.77%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal−Compensating Balance×Days in the yearDays Loan is Outstanding=$10,100$631,000×36055=1.60%×6.55=10.48%

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Answer 3

Textbook Question

Chapter 8, Problem 25P

Harper Engine Company needs $631,000 to take a cash discount of 2.5/20, net 75. A banker will lend 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.)

a.

Expert Solution

Summary Introduction

To calculate: The effective rate of interest for Harper Engine Company.

Introduction:

Effective rate:

Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific period of time.

Answer to Problem 25P

The effective rate of interest on the loan for Harper Engine Company is 13.82%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal×Days in the year (360)Days Loan is Outstanding=$13,300$631,000×36055=2.11%×6.55=13.82%

b.

Expert Solution

Summary Introduction

To calculate: The cost of the discount lost for Harper Engine Company.

Introduction:

Cash Discount:

Also known as early payment discount, it is given by the seller to procure early cash payments from customers.

Answer to Problem 25P

The cost of lost discount for Harper Engine Company is 16.77%.

Explanation of Solution

Calculation of the cost of not availing a cash discount:

Cost of lost Discount=Discount%100% - Discount%×360Final Due Date - Discount Period=2.50%100%−2.50%×36075−20=2.56%×6.55=16.77%

c.

Expert Solution

Summary Introduction

To calculate: Whether Harper Engine Company should borrow funds on the basis of the terms of the cash discount.

Introduction:

Cash Discount:

Also known as early payment discount, it is given by the seller to procure early cash payments from customers.

Effective interest rate

Also termed as annual equivalent rate, it is the rate to be charged on an investment and a loan over a specific period of time.

Answer to Problem 25P

Yes, the funds should be borrowed and the cash discount shall be availed by Harper Engine Company as the cost of taking the loan, that is, 13.82%, is lower than the cost of not taking the discount, that is, 16.77%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal×Days in the yearDays Loan is Outstanding=$13,300$631,000×36055=2.11%×6.55=13.82%

Calculation of the cost of not availing a cash discount:

Cost of lost Discount=Discount%100%−Discount%×360Final Due Date−Discount Period=2.50%100%−2.50%×36075−20=2.56%×6.55=16.77%

d.

Expert Solution

Summary Introduction

To calculate: The amount that Harper Engine Company should borrow to have $631,000.

Introduction:

Compensating Balance:

Also known as offsetting balance, it is the minimum balance that the borrowing company needs to maintain in its bank account. This benefits the lender by lowering their cost of lending.

Answer to Problem 25P

The amount to be borrowed by Harper Engine Company is $701,111.

Explanation of Solution

Calculation of the amount to be borrowed:

Amount to be Borrowed = Amount needed1−C=$631,0001−0.10=$631,0000.90=$701,111

e.

Expert Solution

Summary Introduction

To calculate: The effective rate of interest, and determine whether Harper Engine Company should borrow with a compensating balance of 10%.

Introduction:

Effective rate:

Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific period of time.

Compensating Balance:

Also known as offsetting balance, it is the minimum balance that the borrowing company needs to maintain in its bank account. This benefits the lender by lowering their cost of lending.

Answer to Problem 25P

The effective rate of interest is 10.48%.

Yes, the funds should be borrowed and the cash discount should be availed by Harper Engine Company as the cost of taking the loan, that is, 10.48%, is lower than the cost of not availing the discount, that is, 16.77%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal−Compensating Balance×Days in the yearDays Loan is Outstanding=$10,100$631,000×36055=1.60%×6.55=10.48%

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Answer 4

Textbook Question

Chapter 8, Problem 25P

Harper Engine Company needs $631,000 to take a cash discount of 2.5/20, net 75. A banker will lend 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.)

a.

Expert Solution

Summary Introduction

To calculate: The effective rate of interest for Harper Engine Company.

Introduction:

Effective rate:

Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific period of time.

Answer to Problem 25P

The effective rate of interest on the loan for Harper Engine Company is 13.82%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal×Days in the year (360)Days Loan is Outstanding=$13,300$631,000×36055=2.11%×6.55=13.82%

b.

Expert Solution

Summary Introduction

To calculate: The cost of the discount lost for Harper Engine Company.

Introduction:

Cash Discount:

Also known as early payment discount, it is given by the seller to procure early cash payments from customers.

Answer to Problem 25P

The cost of lost discount for Harper Engine Company is 16.77%.

Explanation of Solution

Calculation of the cost of not availing a cash discount:

Cost of lost Discount=Discount%100% - Discount%×360Final Due Date - Discount Period=2.50%100%−2.50%×36075−20=2.56%×6.55=16.77%

c.

Expert Solution

Summary Introduction

To calculate: Whether Harper Engine Company should borrow funds on the basis of the terms of the cash discount.

Introduction:

Cash Discount:

Also known as early payment discount, it is given by the seller to procure early cash payments from customers.

Effective interest rate

Also termed as annual equivalent rate, it is the rate to be charged on an investment and a loan over a specific period of time.

Answer to Problem 25P

Yes, the funds should be borrowed and the cash discount shall be availed by Harper Engine Company as the cost of taking the loan, that is, 13.82%, is lower than the cost of not taking the discount, that is, 16.77%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal×Days in the yearDays Loan is Outstanding=$13,300$631,000×36055=2.11%×6.55=13.82%

Calculation of the cost of not availing a cash discount:

Cost of lost Discount=Discount%100%−Discount%×360Final Due Date−Discount Period=2.50%100%−2.50%×36075−20=2.56%×6.55=16.77%

d.

Expert Solution

Summary Introduction

To calculate: The amount that Harper Engine Company should borrow to have $631,000.

Introduction:

Compensating Balance:

Also known as offsetting balance, it is the minimum balance that the borrowing company needs to maintain in its bank account. This benefits the lender by lowering their cost of lending.

Answer to Problem 25P

The amount to be borrowed by Harper Engine Company is $701,111.

Explanation of Solution

Calculation of the amount to be borrowed:

Amount to be Borrowed = Amount needed1−C=$631,0001−0.10=$631,0000.90=$701,111

e.

Expert Solution

Summary Introduction

To calculate: The effective rate of interest, and determine whether Harper Engine Company should borrow with a compensating balance of 10%.

Introduction:

Effective rate:

Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific period of time.

Compensating Balance:

Also known as offsetting balance, it is the minimum balance that the borrowing company needs to maintain in its bank account. This benefits the lender by lowering their cost of lending.

Answer to Problem 25P

The effective rate of interest is 10.48%.

Yes, the funds should be borrowed and the cash discount should be availed by Harper Engine Company as the cost of taking the loan, that is, 10.48%, is lower than the cost of not availing the discount, that is, 16.77%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal−Compensating Balance×Days in the yearDays Loan is Outstanding=$10,100$631,000×36055=1.60%×6.55=10.48%

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

a.

Expert Solution

Summary Introduction

To calculate: The effective rate of interest for Harper Engine Company.

Introduction:

Effective rate:

Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific period of time.

Answer to Problem 25P

The effective rate of interest on the loan for Harper Engine Company is 13.82%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal×Days in the year (360)Days Loan is Outstanding=$13,300$631,000×36055=2.11%×6.55=13.82%

b.

Expert Solution

Summary Introduction

To calculate: The cost of the discount lost for Harper Engine Company.

Introduction:

Cash Discount:

Also known as early payment discount, it is given by the seller to procure early cash payments from customers.

Answer to Problem 25P

The cost of lost discount for Harper Engine Company is 16.77%.

Explanation of Solution

Calculation of the cost of not availing a cash discount:

Cost of lost Discount=Discount%100% - Discount%×360Final Due Date - Discount Period=2.50%100%−2.50%×36075−20=2.56%×6.55=16.77%

c.

Expert Solution

Summary Introduction

To calculate: Whether Harper Engine Company should borrow funds on the basis of the terms of the cash discount.

Introduction:

Cash Discount:

Also known as early payment discount, it is given by the seller to procure early cash payments from customers.

Effective interest rate

Also termed as annual equivalent rate, it is the rate to be charged on an investment and a loan over a specific period of time.

Answer to Problem 25P

Yes, the funds should be borrowed and the cash discount shall be availed by Harper Engine Company as the cost of taking the loan, that is, 13.82%, is lower than the cost of not taking the discount, that is, 16.77%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal×Days in the yearDays Loan is Outstanding=$13,300$631,000×36055=2.11%×6.55=13.82%

Calculation of the cost of not availing a cash discount:

Cost of lost Discount=Discount%100%−Discount%×360Final Due Date−Discount Period=2.50%100%−2.50%×36075−20=2.56%×6.55=16.77%

d.

Expert Solution

Summary Introduction

To calculate: The amount that Harper Engine Company should borrow to have $631,000.

Introduction:

Compensating Balance:

Also known as offsetting balance, it is the minimum balance that the borrowing company needs to maintain in its bank account. This benefits the lender by lowering their cost of lending.

Answer to Problem 25P

The amount to be borrowed by Harper Engine Company is $701,111.

Explanation of Solution

Calculation of the amount to be borrowed:

Amount to be Borrowed = Amount needed1−C=$631,0001−0.10=$631,0000.90=$701,111

e.

Expert Solution

Summary Introduction

To calculate: The effective rate of interest, and determine whether Harper Engine Company should borrow with a compensating balance of 10%.

Introduction:

Effective rate:

Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific period of time.

Compensating Balance:

Also known as offsetting balance, it is the minimum balance that the borrowing company needs to maintain in its bank account. This benefits the lender by lowering their cost of lending.

Answer to Problem 25P

The effective rate of interest is 10.48%.

Yes, the funds should be borrowed and the cash discount should be availed by Harper Engine Company as the cost of taking the loan, that is, 10.48%, is lower than the cost of not availing the discount, that is, 16.77%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal−Compensating Balance×Days in the yearDays Loan is Outstanding=$10,100$631,000×36055=1.60%×6.55=10.48%

Answer 8

a.

Expert Solution

Summary Introduction

To calculate: The effective rate of interest for Harper Engine Company.

Introduction:

Effective rate:

Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific period of time.

Answer to Problem 25P

The effective rate of interest on the loan for Harper Engine Company is 13.82%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal×Days in the year (360)Days Loan is Outstanding=$13,300$631,000×36055=2.11%×6.55=13.82%

Answer 9

a.

Expert Solution

Answer 10

a.

Expert Solution

Answer 11

Expert Solution

Answer 12

Summary Introduction

To calculate: The effective rate of interest for Harper Engine Company.

Introduction:

Effective rate:

Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific period of time.

Answer 13

Answer to Problem 25P

The effective rate of interest on the loan for Harper Engine Company is 13.82%.

Answer 14

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal×Days in the year (360)Days Loan is Outstanding=$13,300$631,000×36055=2.11%×6.55=13.82%

Answer 15

b.

Expert Solution

Summary Introduction

To calculate: The cost of the discount lost for Harper Engine Company.

Introduction:

Cash Discount:

Also known as early payment discount, it is given by the seller to procure early cash payments from customers.

Answer to Problem 25P

The cost of lost discount for Harper Engine Company is 16.77%.

Explanation of Solution

Calculation of the cost of not availing a cash discount:

Cost of lost Discount=Discount%100% - Discount%×360Final Due Date - Discount Period=2.50%100%−2.50%×36075−20=2.56%×6.55=16.77%

Answer 16

b.

Expert Solution

Answer 17

b.

Expert Solution

Answer 18

Expert Solution

Answer 19

Summary Introduction

To calculate: The cost of the discount lost for Harper Engine Company.

Introduction:

Cash Discount:

Also known as early payment discount, it is given by the seller to procure early cash payments from customers.

Answer 20

Answer to Problem 25P

The cost of lost discount for Harper Engine Company is 16.77%.

Answer 21

Explanation of Solution

Calculation of the cost of not availing a cash discount:

Cost of lost Discount=Discount%100% - Discount%×360Final Due Date - Discount Period=2.50%100%−2.50%×36075−20=2.56%×6.55=16.77%

Answer 22

c.

Expert Solution

Summary Introduction

To calculate: Whether Harper Engine Company should borrow funds on the basis of the terms of the cash discount.

Introduction:

Cash Discount:

Also known as early payment discount, it is given by the seller to procure early cash payments from customers.

Effective interest rate

Also termed as annual equivalent rate, it is the rate to be charged on an investment and a loan over a specific period of time.

Answer to Problem 25P

Yes, the funds should be borrowed and the cash discount shall be availed by Harper Engine Company as the cost of taking the loan, that is, 13.82%, is lower than the cost of not taking the discount, that is, 16.77%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal×Days in the yearDays Loan is Outstanding=$13,300$631,000×36055=2.11%×6.55=13.82%

Calculation of the cost of not availing a cash discount:

Cost of lost Discount=Discount%100%−Discount%×360Final Due Date−Discount Period=2.50%100%−2.50%×36075−20=2.56%×6.55=16.77%

Answer 23

c.

Expert Solution

Answer 24

c.

Expert Solution

Answer 25

Expert Solution

Answer 26

Summary Introduction

To calculate: Whether Harper Engine Company should borrow funds on the basis of the terms of the cash discount.

Introduction:

Cash Discount:

Also known as early payment discount, it is given by the seller to procure early cash payments from customers.

Effective interest rate

Also termed as annual equivalent rate, it is the rate to be charged on an investment and a loan over a specific period of time.

Answer 27

Answer to Problem 25P

Yes, the funds should be borrowed and the cash discount shall be availed by Harper Engine Company as the cost of taking the loan, that is, 13.82%, is lower than the cost of not taking the discount, that is, 16.77%.

Answer 28

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal×Days in the yearDays Loan is Outstanding=$13,300$631,000×36055=2.11%×6.55=13.82%

Calculation of the cost of not availing a cash discount:

Cost of lost Discount=Discount%100%−Discount%×360Final Due Date−Discount Period=2.50%100%−2.50%×36075−20=2.56%×6.55=16.77%

Answer 29

d.

Expert Solution

Summary Introduction

To calculate: The amount that Harper Engine Company should borrow to have $631,000.

Introduction:

Compensating Balance:

Also known as offsetting balance, it is the minimum balance that the borrowing company needs to maintain in its bank account. This benefits the lender by lowering their cost of lending.

Answer to Problem 25P

The amount to be borrowed by Harper Engine Company is $701,111.

Explanation of Solution

Calculation of the amount to be borrowed:

Amount to be Borrowed = Amount needed1−C=$631,0001−0.10=$631,0000.90=$701,111

Answer 30

d.

Expert Solution

Answer 31

d.

Expert Solution

Answer 32

Expert Solution

Answer 33

Summary Introduction

To calculate: The amount that Harper Engine Company should borrow to have $631,000.

Introduction:

Compensating Balance:

Also known as offsetting balance, it is the minimum balance that the borrowing company needs to maintain in its bank account. This benefits the lender by lowering their cost of lending.

Answer 34

Answer to Problem 25P

The amount to be borrowed by Harper Engine Company is $701,111.

Answer 35

Explanation of Solution

Calculation of the amount to be borrowed:

Amount to be Borrowed = Amount needed1−C=$631,0001−0.10=$631,0000.90=$701,111

Answer 36

e.

Expert Solution

Summary Introduction

To calculate: The effective rate of interest, and determine whether Harper Engine Company should borrow with a compensating balance of 10%.

Introduction:

Effective rate:

Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific period of time.

Compensating Balance:

Also known as offsetting balance, it is the minimum balance that the borrowing company needs to maintain in its bank account. This benefits the lender by lowering their cost of lending.

Answer to Problem 25P

The effective rate of interest is 10.48%.

Yes, the funds should be borrowed and the cash discount should be availed by Harper Engine Company as the cost of taking the loan, that is, 10.48%, is lower than the cost of not availing the discount, that is, 16.77%.

Explanation of Solution

Calculation of the effective rate of interest:

Effective Rate of Interest = InterestPrincipal−Compensating Balance×Days in the yearDays Loan is Outstanding=$10,100$631,000×36055=1.60%×6.55=10.48%

Answer 37

e.

Expert Solution

Answer 38

e.

Expert Solution

Answer 39

Expert Solution

Answer 40

Summary Introduction

To calculate: The effective rate of interest, and determine whether Harper Engine Company should borrow with a compensating balance of 10%.

Introduction:

Effective rate:

Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific period of time.

Compensating Balance:

Also known as offsetting balance, it is the minimum balance that the borrowing company needs to maintain in its bank account. This benefits the lender by lowering their cost of lending.

Answer 41

Answer to Problem 25P

The effective rate of interest is 10.48%.

Yes, the funds should be borrowed and the cash discount should be availed by Harper Engine Company as the cost of taking the loan, that is, 10.48%, is lower than the cost of not availing the discount, that is, 16.77%.