Use the ordinary interest method, 360 days, to solve the following word problem. Round to the nearest cent when necessary. Richie Powers is the owner of American Eagle Boats, a manufacturer of custom pleasure boats. Because of the economic recession and slow boat sales recently, American Eagle has begun accepting promissory notes from its dealers to help finance large orders. This morning American Eagle accepted a 90 day, 8.6% promissory note for $800,000 from one of its sales dealers. You are a manager for a bank, and Richie is one of your clients. Your bank's discount rate is currently 13%. Richie's goal is to discount the note as soon as possible, but not until the proceeds are at least equal to the face value of the note, $800,000. (a) As his banker, Richie has asked you to "run the numbers" at ten day intervals starting with day 20 and advise him as to when he can discount the note and still receive his $800,000. Find the bank discount (in $) for days 20, 30, and 40, and indicate for each discount whether it is too high or whether it is low enough for Richie to discount the note and still receive his $800,000. Day 20: $ ---Select-- Day 30: 2$ --Select--- Day 40: ---Select--- (b) (Challenge) Calculate the exact day the note should be discounted to meet Richie's goal. Day

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 29P

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Use the ordinary interest method, 360 days, to solve the following word
problem. Round to the nearest cent when necessary.
Richie Powers is the owner of American Eagle Boats, a manufacturer of
custom pleasure boats. Because of the economic recession and slow boat
sales recently, American Eagle has begun accepting promissory notes from
its dealers to help finance large orders. This morning American Eagle
accepted a 90 day, 8.6% promissory note for $800,000 from one of its sales
dealers.
You are a manager for a bank, and Richie is one of your clients. Your bank's
discount rate is currently 13%. Richie's goal is to discount the note as soon
as possible, but not until the proceeds are at least equal to the face value of
the note, $800,000.
(a) As his banker, Richie has asked you to "run the numbers" at ten day
intervals starting with day 20 and advise him as to when he can discount
the note and still receive his $800,000.
Find the bank discount (in $) for days 20, 30, and 40, and indicate for
each discount whether it is too high or whether it is low enough for Richie
to discount the note and still receive his $800,000.
Day 20:
--Select---
Day 30:
$
---Select---
Day 40:
$
-Select---
(b) (Challenge) Calculate the exact day the note should be discounted to
meet Richie's goal.
Day

Expert Solution

Step 1

Answer a)

$Since the promissory note is of 90 days hence interest would be of 90 days$

$\begin{array}{rcl} Interest for 90 days & = & Note amount \times Interest rate \times \frac{90}{360} \\ = & $ 800000 \times 8.6 % \times \frac{90}{360} \\ = & $ 17200 \end{array}$

$\begin{array}{rcl} Maturity value of note & = & $ 800000 + $ 17200 \\ = & $ 817200 \end{array}$

$To receive $ 800000 after discounting, discount amount will be $ 17200 (817200 - 800000)$

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