Problem:
Slipshod Machine Tool Co. owes $55,000 to one of its suppliers. The supplier has offered a trade discount of 2/10 net 30. Slipshod can borrow the funds from either of two banks: First City Bank will loan the funds for 20 days at a cost of $500; Upstart Bank offers a discounted loan for 20 days at a cost of $375.
Required:
Question 1: What is the cost of failing to take the discount?
Question 2: What is the effective interest rate on each of the loans?
Question 3: Should Slipshod take the cash discount?
Question 4: Which bank loan should Slipshod use? Please explain.
Note: Please provide step by step solution.