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Cash Discount for Suppliers

1) A supplier is offering you firm a cash discount of 2 percent if purchses are paid for within ten days otherwisse the bill is due at the end of sixty days. Would you recommend borrowing from a bank at an 18 percent annual interst rate to take advantage of the cash discount offer? Explain

2) Assume that you have been offered cash discounts on merchandise that can be purchaed from either of two suppliers. Supplier A offers trade credit terms of 3/20, net 70, while supplier B offers 4/15, net 80. What is the approximate effective cost of missing the cash discounts form each supplier? If you not take advantage of either cash discount offer, which supplier who you select?

4) Compute the effective cost of not taking the cash discount under the following trade credit terms:

a) 2/10 net 40

b) 2/10 net 50

c) 3/10 net 50

d) 2/20 net 40

5) What conclusion can you make about credit terms from reviewing your solutions in problem 4 ?

Solution Preview

1) A supplier is offering you firm a cash discount of 2 percent if purchses are paid for within ten days otherwisse the bill is due at the end of sixty days. Would you recommend borrowing from a bank at an 18 percent annual interst rate to take advantage of the cash discount offer? Explain

In order to to that, we need to find the implicit interest rate in the cash discount offer and compare it with the bank interest rate. Suppose we have made a purchase of $100. The free credit period is 10 days. If the pay within 10 days, I need to make a payment of $98. If I do not make the payment in 10 days, then it means that I pay at the 50 days ( I pay at the end of 60 days - this is 50 days after the discount period ends). This is the ...

Solution Summary

The solution explains how to calculate the cost of not taking the cash discount and how to choose between two suppliers.

$2.19