Question

In: Finance

St. Elsewhere buys $30 million in medical supplies from Knight Rider Industries (KRI). KRI offers St....

St. Elsewhere buys $30 million in medical supplies from Knight Rider Industries (KRI). KRI offers St. Elsewhere terms of 3/10, net 50. Currently the hospital is paying KRI on day 10. Assume 365 days in a year.

(A) What is the total trade credit available from KRI? $

(B) What is the amount of the costly trade credit? $

(C) Should the hospital continue to pay on day 10, or take the costly credit? Assume the hospital can get a bank loan at 9 percent.

1. Yes, keep paying on day 10

2. No, replace with costly credit

Solutions

Expert Solution

(A)

Compute the total trade credit from KRI, using the equation as shown below:

Total credit = Supplies cost*Discount percentage

                   = $30,000,000*3%

                   = $900,000

Hence, the total trade credit from KRI is $900,000.

(B)

Compute the amount of costly trade credit, using the equation as shown below:

Amount of costly credit = Supplies cost*Interest rate*Period due

                                       = $30,000,000*9%*10/365

                                       = $73,973

Hence, the amount of costly credit is $73,973.

(C)

The trade discount is $900,000 and the cost of costly trade credit is $73,973. This means taking the loan results in additional benefits to the company and thus the company should take the loan.

jeff jeffy answered 2 weeks ago
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