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Home Aptitude Simple Interest See What Others Are Saying!
  • Question
  • A merchant receives an invoice for a motor boat for $20 000 with terms 4/30, n/100. What is the highest simple interest rate at which he can afford to borrow money in order to take advantage of the discount?


  • Options
  • A. 247.67
  • B. 237.67
  • C. 227.67
  • D. 215.67

  • Correct Answer
  • 247.67 

    Explanation

    Suppose the merchant will take advantage of the cash discount of 4% of $20 000 = $800 by paying the bill within 30 days from the date of invoice. He needs to borrow $20 000 = $800 = $19 200. He would borrow this money on day 30 and repay it on day 100 (the day the original invoice is due) resulting in a 70-day loan. The interest he should be willing to pay on borrowed money should not exceed the cash discount $800.

     

    r=I/pt=21.73%

     

    The highest simple interest rate at which the merchant can afford to borrow money is 21.73%. This is a break-even rate. If he can borrow money, say at a rate of 15%, he should do so. He would borrow $19 200 for 70 days at 15%. Maturity value of the loan is $19 200(1+0.15(70/365))=$19 752.33

     

    savings would be $20 000 ? $19 752.33 = $247.67

  • Tags: Bank Exams, Bank PO

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