Question

In: Finance

Your company’s primary supplier has decided to change its credit terms from 1/10 net 60 to 2/10 net 30.

Your company’s primary supplier has decided to change its credit terms from 1/10 net 60 to 2/10 net 30. Assuming that you can borrow from the bank at a stated interest rate of 9.5%, which of the following statements is true?

a) Your company shouldn’t take the discount under the new terms; you did take the discount under the old terms.

b) Your company should take the discount under the new terms; you didn’t take the discount under the old terms.

c) Your company took the discount under the old terms and will continue to do so with the new terms.

d) Your company shouldn’t take the discount under either set of terms.

Solutions

Expert Solution

c. The company took discount under old erms and will continue to do so with new terms.

It can borrow @ 9.5/12 = 0.79% monthly whereas it can get a discount of 1% under old term and 2% under new term.

This is favourable if the company can repay the loan within 1 month..

If the company needs 2 months to repay the loan, it should not accept the old term but new term is favourable.

If repayments takes more than 2 months, no discount should be taken

jeff jeffy answered 2 years ago
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