Question

6. You are booking an invoice into you CA project with an accounts payable condition of 1.5/20 Net 60. Assuming you do not have the cash to take the discount would you take a loan within the discount days at an interest rate of 32%? Explain fully using math logic and descriptive words. 7. As a student seeking to graduate with an MBA you may have to decide on investing in projects that yield returns that are taxable and non-taxable. In other words, at what % return would a non-taxable investment be equivalent to a taxable investment assuming a marginal tax rate of 40 and a tax-free investment is yielding 6,5%. Essentially, you are required to find an equivalent before tax investment after tax investment product. 8. Page 271 # 21 Chapter 8 (see notes in Weeks 9 and, or 10) 9. Risk & Return Exp Ret Deviation Situation Asset A Situation Probability Returns Recession 0.15 292 Normal 0.55 10% Boom 0.30 15% Expected Return Coefficient of Variation Asset A- Asset B Probability Returns Exp Ret Deviations 0.15 -30% 0.55 18% 0.30 31% Expected Return - Risk - Coefficient of Variation Asset B - Risk - Asset A Asset B Parameters Expected returns Risk Coefficient of Variation

Answer 1

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Solution- 6

The invoice is payable at a condition of 1.5/20 Net 60.

This means that either the invoice can be paid with 1.5% discount in the first 20 days or else without discount in 60 days.

In the given situation, since cash is not available to pay upfront in next 20 days to avail the discount, a loan will be required to be taken if the payment is to be made in the discount period. There is a 20-day window to avail the discount, so it is to be assumed that this 20 day window will be fully used if the discount option is availed (i.e. the payment will be made on the last day of 20 day window).

Therefore, if the payment is made with discount on the last day (i.e. 20th day), the loan will be required for 40 days (i.e. 60days - 20 days) as the payment can otherwise be made without discount using a 60 days window.

Hence, % interest cost for a 32% loan availed for 40 days is as follows:

Interest cost (% of payment)= Annual interest rate*(40/365)= 32%*(40/365)= 3.51%

The interest cost as calculated above is more than the discount offering of 1.5%. Therefore, it's not financially viable to take a loan to make payment within the discount period.