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    Working Capital Management: Discount & Interest Rates

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    Company X sells on a 1/30, net 60 basis. Customer Y buys goods invoiced at $1,000.

    a. How much can Y deduct from the bill if Y pays on day 30?
    b. What is the effective annual rate of interest if Y pays on the due date rather than on day 30?
    c. How would you expect payment terms to change if
    i. The goods are perishable.
    ii. The goods are not rapidly resold.
    iii. The goods are sold to high-risk firms.

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    Solution Preview

    a) If the bill is paid on 30th day, Y can deduct 1% discount. So Y can deduct 1000*1%=$10 and should pay $990.

    b) Y can pay $1000 on 60th Day, so Y is paying $10 for extending a credit of $990 days for a period of 30 days ...

    Solution Summary

    The solution examines working capital management to compute discounts and the annual rate of interest. The expert determines if you would expect payment terms to change if the good are perishable, goods are not rapidly resold or if the goods are sold to high-risk firms.