Brand Advertising Is Offered a 3/10, Net 40 Trade Discount

Essay

Brand Advertising is offered a 3/10, net 40 trade discount by its supplier. In the past, Brand has been able to get away with paying for supplies on credit in 60 days. Since it doesn't have money on hand to take advantage of the discount, it tries to negotiate a loan with Portland State Bank. The amount of $400,000 with a 12% compensating balance and a $6,200 interest charge has been negotiated for the month of May. Brand already maintains a $16,250 balance at the bank. Compute the effective rate of interest on the loan, and the cost of not taking the discount. Should Brand take advantage of the cash discount?