Question

3. Smart Inc. is going to purchase a $12,000 machine. The vendor offered a term of 3/15 net 45 of payment. a) If Smart take cash discount when should company make payment and how much is payment? b) If company give up discount when and how much should company pay? c) What is the cost of giving up the discount?

Answer 1

First of all lets understand the statement 3/15 net 45

It means that the company pays within 15 days it enjoys discount of 3% and if it pays within 45 days then it pays the full cost of the system.

a. If the Company wants cash discount then the company should pay within 15 days and thus receive 3% discount so it will pay 12000 * (1-0.03) = $11,640

b. If the company gives up discount then it should pay on 45th day and pay $12000

Cost of Giving up cash discount = CD/(1-CD) * 365/N

CD= Cash Discount

N = number of days that the payment can be delayed by giving up the cash discount

= credit period - cash discount period

= 45 - 15

= 30

Thus Cost = 0.03/(1-0.03) * 365/30

= 0.03092783 * 12.1666666667

= 0.37628

= 37.63%