Question

Your supplier has just revised your trade credit terms so that if you pay by day 5 then the annualized cost of the trade credit discount is 7% if you do not pay by day 5 then you must pay by day 10 your firm has an annual opportunity cost rate of 8% when should you repay the trade credit obligation

Answer 1

The revised credit terms are as follows :-

1. We have to pay with in day 5 to get a trade discount of 7%.

2. If we failed to pay with in day 5 then we need to pay within day 10.

The our firm has an annual opurtunity cost of rate of 8%.

The firm should pay the amount by analysing the better returns.

Analysing the available oportunities :-

If paid with in Day 5	if paid after Day 5 aand with in Day 10
Availing of 7% trade discount	loss of 7% trade discount
Loss of 8% oportunity cost rate	availment of 8% oportunity cost rate
Net benefit :- loss of 1% to us	net benefit :- availment of 1%

By above analysis, we can say that it is better to pay after Day 5 and within Day 10 and use the annual oppurtunity cost rate of 8%.

By following this strategy, we can get 8% return on amount payable to creditor and loss of 7% trade discount on amount payable, it gives 1% on net payable to creditor as net benefit.

These are all the information required to solve the above given question.

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