Bulldog Inc. recently made a $5,500 purchase from a vendor. The vendor will acce
ID: 2800547 • 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
Purchase payables under ACH = $5500, Processing Cost = $0.5 and ACH payment discount =0.25% of Purchase payables.
Therefore, Purchase Payables Post Discount = 5500 - (0.0025 x 5500) = $5486.25
Total ACH disbursement = 5486.25 + Processing Fees = 5486.25 + 0.50 = $5486.75
Discount Rate per annum = 9% . Therefore, discount rate on a per day basis = ( Discount Rate per annum) / 360 = 0.025% (Assuming a 360 day year for ease of calculation)
Therefore, Discount rate for 46 days (45 days credit period + 1 day of float under ACH payment) = 46 x 0.025 = 1.15%
Therefore, Present Value of Total Disbursement under ACH = 5486.75 / 1.0115 = $5424.36
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