Question

2.   The credit terms are; 3/15 with a net date of 45 days (show work):

a. Calculate the interest savings associated with taking this discount:

b. The Notes Payable or short-term borrowing rate is 5%. Should the discount be taken?

c. Given your answer in part b, when should the purchasing company pay the bill?

Answer 1

Ans 2)

a)

Credit Terms 3/15 with a net date of 45 day

Means 3% discount when paid within 15 days of sales. Otherwise, pay within 45 days (Without Discount).

Early Payment Days = Days without Discount- No of days within  Discount = 45 - 15 = 30 Days

Annual Savings in Interest = x% ,

X = 36%

Ans:  interest savings associated with taking this discount = 36%

b)

The Notes Payable or short-term borrowing rate is 5%.

Ans: As borrowing rate is much lower than annual discount rate it is advisable to borrow at 5% and take the advantage of the cash discount.

c)

when should the purchasing company pay the bill :

The Purchasing company pays the bill at the last day of the contract. Suppose if they are taking cash discount pay bill only on 15th day. If they are not taking any discount will pay on 45th day only.