Question:

China Corp., a rapidly growing startup, has hired you as its new CFO. Cash is tight, and the company must continually go to the bank to increase its line of credit, which carries a 5.50% interest charge. Your company uses a discount rate of 6.70% in its NPV calculations. You have been paying your suppliers in 15 days to avoid being late. Your suppliers offer terms of 2.4/15 net 60. Your CEO, Alysha, has asked you to see if you should increase the company line of credit even more so that China Corp. can take advantage of the discount being offered. You can do it by calculating the effective rate of interest (EAR) you are foregoing by not taking the discount and comparing it to your internal discount rate.

Thanks