assume a seller has a WACC of 10% and wants to offer terms of 1/5, n/15...

assume a seller has a WACC of 10% and wants to offer terms of 1/5, n/15 and the average credit sale is 100,000, what is the benefit(cost) of offering the discount to the seller?

Expert Solution

offer terms of 1/5, n/15

Means that if paid in 5 days .... 1% discount is allowed, otherwise payable in 15 days with no discount.

Thus 1% is the cost for 10 days of finance ( i.e from 5th day to 15th day). In annual terms it is 1% * 365 days / 10 days. = 36.5%

Cost of offering the discount to the seller = 36.5% - 10% = 26.5%

If answer is needed in dollars = 100,000 * 26.5% = 26500

note

If 360 days year is taken for calculation......... the final values will change as 26% and $ 26000

ekkarill92 answered 2 years ago

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