When Deciding Whether or Not to Take a Cash Discount

question 33

True/False

When deciding whether or not to take a cash discount, the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

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Definitions:

Compounded Annually

The process wherein the interest earned on an investment is added to the principal each year, and in the subsequent year, interest is earned on this new principal.

Market Rate

The prevailing price or interest rate available in the marketplace for goods, services, or securities at a given time.

Contract Rate

The interest rate stated in a contract, such as a loan or bond agreement.

Present Value

The value in present terms of a sum of money or cash flows due in the future, determined with a set rate of return.