Question

Cash Discounts

Suppose a firm makes purchases of $3.55 million per year under terms of 3/10, net 30, and takes discounts. Assume 365 days in a year for your calculations. Do not round intermediate calculations.

1. What is the average amount of accounts payable net of discounts? (Assume that the $3.55 million of purchases is net of discounts - that is, gross purchases are $3,659,794, discounts are $109,794, and net purchases are $3.55 million.) Round your answer to the nearest dollar.
   $  
   
2. Is there a cost of the trade credit the firm uses?
       -Select-IIIItem 2
   I. There is no cost of trade credit at this point. The firm is using "free" trade credit.
   II. The cost of the trade credit is $291,781.
   
3. If the firm did not take discounts but it did pay on the due date, what would be its average payables? Round your answer to the nearest dollar.
   $  
   If the firm did not take discounts but it did pay on the due date, what would be its nominal cost? Round your answer to two decimal places.
        %
   If the firm did not take discounts but it did pay on the due date, what would be its effective cost? Round your answer to two decimal places.
        %
   
4. What would the firm's cost of not taking discounts be if it could stretch its payments to 39 days? Round your answers to two decimal places.

   Nominal cost	%
   Effective cost	%

Answer 1