Prime Bank is offering your company the use of their cash collection service. They estimate that by speeding up your access to cash you can receive benefits with a present value of $1,138,500. The current cost of money is .011% per day. Prime Bank will charge your firm an annual fee of $27,500 (paid at the end of each year) plus a $39.60 processing fee (paid daily). Required: Assume a 365-day year. a. What discount rate should you use to discount the $27,500 annual fee

Given Information:

Current cost of money = r = 0.011% per day

Period = n = 365 days

Required Information:

Discount rate = ?

Discount rate = 4.096%

Explanation:

The required annual discount rate to discount the annual fee is given by

Where r is the current cost of money and n is the period in days

Current cost of money = r = 0.011/100 = 0.00011

Therefore, 4.096% is the required annual discount rate to discount the annual fee of $27,500.

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