Neveready Flashlights Inc. needs $470,000 to take a cash discount of 2/10, net 60. A banker will loan the money for 50 days at an interest cost of $7,200.

a. What is the annual rate on the bank loan? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Annual rate %

b. How much would it cost (in percentage terms) if the firm did not take the cash discount, but paid the bill in 60 days instead of 10 days? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Cost of not taking a cash discount %

c. Should the firm borrow the money to take the discount?

multiple choice 1

• Yes

• No

d. If the banker requires a 15 percent compensating balance, how much must the firm borrow to end up with the $470,000? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Amount to be borrowed $

e-1. What would be the effective interest rate in part d if the interest charge for 50 days were $10,300? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Annual rate %

e-2. Should the firm borrow with the 20 percent compensating balance? (The firm has no funds to count against the compensating balance requirement.)

multiple choice 2

• No

• Yes

QUESTION 2

Bridget Jones has a contract in which she will receive the following payments for the next five years: $4,000, $5,000, $6,000, $7,000, $8,000. She will then receive an annuity of $11,500 a year from the end of the sixth year through the end of the 15^th year. The appropriate discount rate is 14 percent.

a. What is the present value of all future payments? (Use a Financial calculator to arrive at the answer. Round the final answer to the nearest dollar amount.)

Present value $

b. If she is offered a buyout of the contract for $33,000, should she do it?

multiple choice

• Yes

• No