## Related questions with answers

Lancaster Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 55; and it currently pays on the 5th day and takes discounts. Lancaster plans to expand, which will require additional financing. If Lancaster decides to forgo discounts, how much additional credit could it obtain, and what would be the nominal and effective cost of that credit? If the company could get the funds from a bank at a rate of 9%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Should Lancaster use bank debt or additional trade credit? Explain.

Solution

VerifiedTo begin this problem we should determine how many days after the discount period there are. We know the total number of days is 55 and the discount period is 5 days, therefore 50 days after the discount period.

In order to find the addition credit Lancaster could obtain we can use the equation posted below-

$\textbf{Additional Credit}$= $\dfrac{\textbf{Asset cost}}{\textbf{Days in year}}\times \textbf{Number of days}$

$\textbf{Additional credit}$= $\dfrac{\$8,000,000}{365}\times50\,\,\textbf{Days}$

$\textbf{Additional credit}$=$\$1,095,890.41$

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