Question

To finance additional inventory, Arbutus Ltd. is considering forgoing the cash discount on all of its purchases currently offered on terms of 2/10, net 45. No payments will be stretched. Annual purchases are $9.21 million.

 

a. Calculate the additional financing available to Arbutus Ltd. by forgoing the cash discount. (Use 365 days in a year. Do not round intermediate calculations. Enter answer in whole dollar, not in millions. Don't discount gross purchases to arrive at the accounts payable positions.)

 

Additional financing available           $ 

 

b. Calculate the annual cost of forgoing the cash discount. (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

 

Cost of lost discount            %

Answer 1

$ 1,135,479 =9210000*45/365 a) Accounts payable forgoing discount Less: Accounts payable taking discount $ 252,329 =9210000* 10/365 Additional financing available $ 883,151 b) Cost of lost discount 21.28% =2%/(1-2%)*(365/(45-10))