Question

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Early Payment discount decisions Prairie Manufacturing has four possible suppliers, all of which offer different credit terms. Except for the differences in credit terms, their products and services are virtually identical. The credit terms offered by these suppliers are shown in the following table: E: (Note: Assume a 365-day year.) a. Calculate the approximate cost of giving up the cash discount from each supplier. b. If the firm needs short-term funds, which are currently available from its commercial bank at 10%, and if each of the suppliers is viewed separately, which, if any, of the suppliers' cash discounts should the firm give up? c. Now assume that the firm could stretch by 30 days its accounts payable (net period only) from supplier M. What impact, if any, would that have on your answer in part b relative to this supplier? a. The approximate cost of giving up the cash discount from supplier J is %. (Round to two decimal places.) i Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Supplier Credit terms 2/5 net 40 EOM 2/30 net 100 EOM 1/15 net 70 EOM 2/30 net 120 EOM Print Done

Answer 1

a.
Cost of giving up cash discount
J : 2%/98% x (365/35) = 21.28%
K : 2%/98% x (365/70) = 10.64%
L : 1%/99% x (365/55) = 6.70%
M : 2%/98% x (365/90) = 8.28%

b.
The firm should give up L and M, since cost of giving up is less than bank rate

c.
There would be no difference to answer b, since cost of giving up was already lower than bank rate, stretching period with 30days will further reduce the cost of giving up