Bulldog Inc. recently made a $5,500 purchase from a vendor. The vendor will acce
ID: 2800536 • Letter: B
Question
Bulldog Inc. recently made a $5,500 purchase from a vendor. The vendor will accept payment by check or ACH. In either case, the vendor offers net trade credit terms of 45 days. The assistant treasurer of Bulldog Inc. notes that payment by check will provide an additional 3 days of float (beyond the 45 days of trade credit), relative to payment by ACH (assume an additional one day of float beyond the trade credit period). It costs $1 to process a check and costs $0.50 to process an ACH payment. In an effort to encourage Bulldog Inc. to pay via ACH, the vendor has offered a 0.25% discount for ACH payments. Assuming a discount rate of 9%, what is the present value of an ACH disbursement?
Explanation / Answer
Accounts receivable=$5,500.
Discount rate=9%
Additional discount=0.25%.
The amount if paid through ACH=$5,500*(1-.0025)
=$5,486.25.
Present value of this amount is as follows:
Given interest rate=9%,
It means the proceeds of $5,486 will include the interest for 46 days.
Let x be present value of $5,486.
Interest for 46 days=9%/360*46 days (assuming 360 day count convention)
=0.0115.
Therefore x+x*0.0115 =$5,486.
x=$5,423.63
Therefore, present value of $5,500 received through ACH=$5,423.63.
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