Answer:
Ans. The seller´s cost of capital has to be 70.73% annual in order to justify this 5% discount if bills are paid within 10 days.
Explanation:
Hi, in order for discount to be justified, the seller´s cost of capital must be equal or higher than the cost of this discount, and to find this amount, we must use the following formula.
[tex]DiscountCost=(1+\frac{Discount}{1-Discount}) ^{\frac{365}{DaysToPay-DiscountPeriod} } -1[/tex]
Where the discount is presented in its decimal form. So it should look like this.
[tex]DiscountCost=(1+\frac{0.05}{1-0.05}) ^{\frac{365}{45-10} } -1=0.7073[/tex]
That is 70.73% annual.
Best of luck.
