Arizona Health Services (AHS) buys $500,000 of a particular item (at gross prices) from its major supplier, Cardinal Health, which offers AHS terms of 3/20, net 60. Currently, the hospital is paying the supplier the full amount due on Day 60 but it is considering taking the discount, paying on Day 20 and replacing the trade credit with a bank loan that has a 12% interest rate.

1. What is the approximate annual cost of the costly trade credit?

A.13.80%

B.27.80%

C.50%

2. Should AHS replace its trade credit with the bank loan?

A.No. The bank loan rate is higher than the costly credit rate, so AHS should take the costly credit.

B.Yes. The bank loan rate is lower than the costly credit rate, so AHS should take the bank loan and refuse all trade credit.

C.Yes. The bank loan rate is lower than the costly credit rate, so AHS should replace the costly credit portion of the credit with a bank loan.

D. Yes. The bank loan rate is higher than the costly credit rate, so AHS should take the credit.

3. If the bank loan is used, how much of the trade credit should be replaced?

A. $13,477

B.$26,944

C.$53,889

D.$80,233