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Credit Terms and Cash Discounts

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4) XieCorp is analyzing the credit terms of each of three suppliers, A, B, and C.
Supplier Credit Terms
A 1/15 net 40
B 2/10 net 30
C 2/15 net 35
(a) Determine the approximate cost of giving up the cash discount. (b) Assuming the firm needs short-term financing, recommend whether or not the firm should give up the cash discount or borrow from the bank at 10 percent annual interest. Evaluate each supplier separately.

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Solution Summary

Credit Terms and Cash Discounts are investigated.

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a)
COST OF TRADE CREDIT TO THE CUSTOMER

R= C(365)/D(100-C)= 14.75%
C=CASH DISCOUNT= 1%
D= NO. OF EXTRA DAYS THAT CUSTOMER CAN USE SUPPLIERS'S FUNDS = 40-15= 25
R= ANNUAL INTEREST RATE FOR THE USE OF THESE ...

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