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Credit Terms and Cash Discounts

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.

Solution Preview

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 ...

Solution Summary

Credit Terms and Cash Discounts are investigated.

$2.19