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

question 185

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

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Definitions:

Income Statement

A financial document that reports a company's financial performance over a specific accounting period, detailing revenue, expenses, and net income.

Balance Sheet

A record that presents a summary of a business's assets, liabilities, and shareholders' equity at a given time.

Return on Assets

A financial ratio that measures the profitability of a company in relation to its total assets.

Net Income

The profit remaining after all expenses, taxes, and costs have been deducted from total revenue.