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In: Finance

Relationship Sales Corp. (RSC) is reviewing the credit terms it receives from one of its suppliers...

Relationship Sales Corp. (RSC) is reviewing the credit terms it receives from one of its suppliers and is considering the following proposal. Futrell Ltd. is offering RSC a volume discount of 3% for making purchases of $9,000,000 of its products at a time instead of RSC's current purchases of $1,500,000 per month. To store the additional inventory, RSC will need to rent more warehouse space, which will cost $15,000 per month (including insurance). Currently, each order costs RSC $24,500 in processing and shipping. The new larger orders will cost $45,000 for processing and shipping. (Assume inventory is drawn down to zero before each new order is received.) RSC's weighted average cost of capital is 10.5%, and it is subject to tax at a rate of 38%.

Determine whether RSC should accept Futrell Ltd.'s 3% volume discount proposal.

Solutions

Expert Solution

PPVF = 10.50/12 = 0.875% i.e. factor of 1.00875, took month 1 is period 0 because purchase will be at the begining so month 6 will be period 5

jeff jeffy answered 1 year ago
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