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? MacBook Pro 2 Т. R. Y

Answer 1

A.

Terms of payment is 3/15 net 45 means 3% discount is given, if paid by 15 days. Otherwise payable by 45 days with full amount

If he takes cash discount he has to pay by 15 days.

Amount paid = invoice Price*(1-discount %)

=12000*(1-3%)

=11640

He has to pay $11640 by 15th day.

B.

If he gives up Discount he has to pay full invoice amount 12000 by 45 days.

C.

Payment days = 45

Discount days = 15

Discount % = 3%

Cost of giving up Discount = %discount/(1-%discount)*365/(Payment days - discount days)

=3%/(1-3%)*365/(45-15)

=0.3762886598 or 37.63%

So cost of giving up Discount is 37.63%