1) A firm received an invoice of $800,000 from a supplier with the terms 2/5, Net...

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1) A firm received an invoice of $800,000 from a supplier with the terms 2/5, Net 40. It will receive 2% discount if paying b

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Answer 1

Answer #1

Present Value of the payment made at the end of 5^th day by availing a discount of 2% = 800,000*(1-0.02)/[1 + (0.08/365)*5]

= 800,000*0.98/(1 + 0.001096)

= 784,000/1.001096

= $783,141.76

.

So if we pay after 5 days availing he discount of 5% , Present Value of the outflow from payment = $783,141.76

.

Present Value of the payment made at the end of 40^th day by paying the full amount = 800,000*(1-0)/[1 + (0.08/365)*40]

= 800,000*1/(1 + 0.0087671)

= 800,000/1.0087671

= 793,047.26

.

So if we pay after 40 days by paying the full amount, Present Value of the outflow from payment = $793,047.26

.

Decision:

So , its better to avail the discount of 2% by paying on 5^th day since outflow in present terms is less in that option. We will save $9,905.49 (793,047.26-783,141.76) in present terms if we avail the discount option and make the payment n 5^th day.

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Answer 2

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