Question

8. Geo-M is considering adding a cash discount to its credit terms. If Geo-M offers 3/11 net 30 rather than its current net 30 policy, what annualized rate is the company charging customers who do not take the discount? Assume a 365-day year.

9. Fickle Sickles collects 15,000 checks per 365-day year with average amount $170 and total delay 5 days. A lockbox system would reduce that delay to 3 days, and it would also reduce FISI's check processing costs by $.01 per check. The annual fee on the lockbox would be $2,500. What is the annual net benefit associated with using the lockbox? FISI has an 7% cost of capital.

Answer 1

8]	The 3% discount is the cost for the 19 days of credit.
	Hence, cost of not taking discount for 19 days = 3/97 =	3.09%
	Annualized cost [without compounding] = (3/97)*(365/19) =	59.41%
	Effective interest rate [with compounding] = (1+3/97)^(365/19)-1 =	79.52%
9]	Annual fee on the lockbox	$      -2,500.00
	Processing costs = 0.01*15000 =	$         -150.00
	Interest saved = (5-3)*(15000/365)*170*7% =	$           978.08
	Net annual benefit associated with the lockbox	$      -1,671.92