Every 10 Days You Receive $5,000 Worth of Raw Materials

Multiple Choice

Every 10 days you receive $5,000 worth of raw materials from your suppliers.The credit terms for these purchases are 3/20, net 30, and thus far you have been paying on the 30th day after each delivery because you are short of cash.You have been contemplating taking out a one-year bank loan for $4,850 (97 percent of the invoice amount) .If the effective annual interest rate on this loan is 20 percent, what will be your net dollar savings over the year by borrowing and then taking the discount? That is, what is the difference between the dollars saved if you take the discount and the dollars spent on interest expense for the loan?

A) $650
B) $1,240
C) $4,430
D) $2,645
E) −$820