Question

1. You are currently re-evaluating your payables policy. Your current supplier offers terms of 1.5/10, net 40 with a late payment fee of 1.5% per month. A supplier wanting your business is willing to offer terms of 2.5/5, net 60 with no stated late payment fee. Your annual borrowing rate is 18%. Assume a 365-day year. a. How long should you delay payment given the terms of your current supplier? Prove your answer by relating the annualized cost of the discount to your investment or borrowing rate. b. How long should you delay payment given the terms of the competing supplier? Prove your answer by relating the annualized cost of the discount to your investment or borrowing rate. Based on an average invoice of $100,000, which supplier should you purchase from, i.e., which set of terms results in the minimum net present-value cost? c.

Answer 1

Page No- Answer Given data, current supplier offers terms Of: 1,5/10 net:40 a late payment fee of - 15:4. per month willing to offer terms of - 2.5/5 nel : 60 annual borrowing rate is = 184. fissume a 365. day gear. a) Here, the term structere used for credit terms is to first state the number of days given to The customers from the in udice data to take advantage of the early payment credit terms.

foi example, a customer is supposed to pay with in 10 days without any discount, the terms are net 10 days" where as if the customer must pay with in bo days Quality for a 27. discount, the terms are allo NOW, calou ate the cost of the credit as follows. 365 Cost of credit = Discount (-Discount %) full allowed payment day. Dis day 1.5% 365 . 1-1.57. ^:40-10 = 1.5%, 365 1-1.5%. 30 -1.5% 365 98.5 .30 = 18.527% = 18.534

1. cost of credit = 18.53% cost of credit is 18.537 and borrowing rate is 18%. 'Hence, . Pay with in 10 days and take the discount. b) Now, Calculate the cost of the credit as follows. Discount % 365 Of credit = (-Discount X- Hill allowed payment- Dis day) 2.5 x 365 = (1-8.5) (60-5). 3.5y365 - 1-2.5 55 2.5 x 365 97.5% 55 = 10.3094 = 10:21% fi: cost of credit = 10.91

Cost Of credil is 10.814. and borrowing rate is 1864 Нежеу Payment canbe displayed Up to 60 days. 6) Select the supplier as follows. calculates for the content supplier. Entries Amoott A mount of invoice 100,000 less. discount can be availed (100,000 X 8.5%) 1,500 wel payable (1,00.000 - 1,500). 98.500

Calculate for the competing Supplier. Endries. Amant filmount of invoice 100,000 less: discount canbe availed (100,000 X 8.5%) 2500 |- Net payable (100200-2,500) 197,500 dis count is not availed, coment supplier charge 15% per month for 40 days.and comperting supplier will not change till 60 days. si competing Supplier should be selected.