Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing equipment to Landcaster's of Australia. Because the two companies have never done business with each other, Cypress requires a banker's acceptance as payment for the $1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Cypress Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum. What is the size of the discount (not including the commission fee) Cypress must take for receiving the proceeds of the sale today rather than waiting for six months? A $7,000 B $5,000 C $12,000 D $14.000

Question

Business

Karley Bell

30 October, 03:48

Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing equipment to Landcaster's of Australia. Because the two companies have never done business with each other, Cypress requires a banker's acceptance as payment for the $1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Cypress Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum. What is the size of the discount (not including the commission fee) Cypress must take for receiving the proceeds of the sale today rather than waiting for six months? A $7,000 B $5,000 C $12,000 D $14.000

+2

Answers (1)

Know the Answer?

Brewster · Answer 1

B) $5,000

Explanation:

Cypress total bill is $1,000,000. Since a foreign bank is going to provide them a service (the acceptance of payment) it will charge them 1.4% per year or 0.7% for thee six month period.

That means that Cypress will collect $1,000,000 x (1 - 0.7%) = $993,000

If Cypress decides to sell the bankers acceptance at a 1% annual fee, he will lose an additional 0.5% for the 6 month period = $930,000 x 0.5% = $4,965. Apparently we have to round to the nearest thousand ≈ $5,000