ShBuld Bob and Carol choose the financing or the cash alternative? aterhative at
ID: 2802036 • Letter: S
Question
ShBuld Bob and Carol choose the financing or the cash alternative? aterhative at the end of 2 years? ii they pay cash? . P16-6 Cash which offer different credit terms. Except for the differences in credit terms, their products and services are virtually identical. The credit terms offered by these suppli- ers are shown in the following table. (Note: Assume a 365-day year.) Supplier Credit terms 1/5 net 30 EOM 2/20 net 80 EOM 1/15 net 60 EOM 3/10 net 90 EOM M a. Calculate the approximate cost of giving up the cash discount from each supplier. b. If the firm needs short-term funds, which are currently available from its com- mercial bank at 9%, and if each of the suppliers is viewed separately, which, if any, of the suppliers' cash discounts should the firm give up? Explain why. Now assume that the firm could stretch by 30 days its accounts payable (net period only) from supplier M. What impact, if any, would that have on your c. answer in part b relative to this supplier?Explanation / Answer
1/5 net 30 means if paid in 5 days, 1% cash discount, otherwise pay in 30 days
30 days EOM (End Of Month payment) term means, if invoice is on 14/01/2018 then due date will it be on end of February i.e 28/02/2018
If payments are spread evenly over the month, 1/5 net 30 EOM terms ideally give additional 15 days for payment on an average (because whether the due date falls on 1st day of month or last day of month, payment is to be made at the end of month)
a) Cost of giving up cash discount from customer
b) If short term funds are available @9% p.a., then firm can give up cash discount of L becasue by availing discount, firm saves only 6.14%.
c) If firm could stretch by 30 days its accounts payables from supplier M, Cost of giving up cash discount
=(100/97-1) x 365 / 125 =9.03%
Therefore, firm is indifferent between short term funds available @ 9% and cash discount from M if firm could stretch its accounts payable by 30 days.
Supplier Credit Terms Additional Credit days if discount is not availed Payment per $100 if dicount is availed if dicount is not availed Cost of giving up discount p.a. J 1/5 net 30 =(30-5)+15 =40 99 100 =(100/99-1) x 365 / 40 =9.22% K 2/20 net 80 =(80-20)+15 =75 98 100 =(100/98-1) x 365 / 75 =9.93% L 1/15 net 60 =(60-15)+15 =60 99 100 =(100/99-1) x 365 / 60 =6.14% M 3/10 net 90 =(90-10)+15 =95 97 100 =(100/97-1) x 365 / 95 =11.88%Related Questions
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