Question

In: Finance

A firm has the following choices to finance its inventory purchase: •Credit terms of 2/15 net...

A firm has the following choices to finance its inventory purchase:

•Credit terms of 2/15 net 45 EOM

•A single payment note with $400,000 principal and an 8% annual interest rate payable in 45 days

•A discount loan with $400,000 principal and 7.85% annual interest rate payable in 45 days

1.Explain what the credit terms mean.

2.Calculate the cost of not taking the discount.

3.Calculate the annualized cost of (a) the single payment note and (b) the discount loan.

4.Of the available options, how should the firm finance its inventory purchase? Should it take the discount or not? If it does, how should it finance the purchase? Support your answer.

Solutions

Expert Solution

A firm has the following choices to finance its inventory purchase:

•Credit terms of 2/15 net 45 EOM

•A single payment note with $400,000 principal and an 8% annual interest rate payable in 45 days

•A discount loan with $400,000 principal and 7.85% annual interest rate payable in 45 days

1. Explain what the credit terms mean.

Credit terms are the payment requirements stated on an invoice bill. It is common for sellers to offer early payment terms to their customers in order to speed up the flow of incoming cash. The credit term include the amount of credit extended to the customer, the time period within which payments must be made by the customer, early payment discount terms and the penalty to be charged if payments are late.

2. Calculate the cost of not taking the discount.

cost of not taking the discount. = 365 / ( Discount period - actual payment period ) *

discount rate / 100 - discount rate

Where,

Discount period = 15 days

actual payment period = 45 days

discount rate = 2%

cost of not taking the discount. = (365 / ( 45 - 15 ) ) * ( 2 / 100 - 2)

cost of not taking the discount. = ( 365 / 30 ) * ( 2 / 98 )

cost of not taking the discount. = 12.166 * 0.020 = 0.2483 = 24.83%

3. .Calculate the annualized cost of (a) the single payment note and (b) the discount loan.

the single payment note

Annualized rate are directly given = 8%

(b) the discount loan.

Effective Rate of Discounted Interest = Interest on the Principal Amount of the Loan / ( Principal Amount – Interest “Withheld” )

Effective Rate of Discounted Interest = 31400 / ( 400000 - 31400)

Effective Rate of Discounted Interest = 31400 / 368600 = 0.0852 *100 = 8.52

4. Of the available options, how should the firm finance its inventory purchase? Should it take the discount or not? If it does, how should it finance the purchase?

They take the trade credit. And after that they take single payment note for 45 days to take the advantage of discount. They should take discount, because the cost of not taking discount is higher than. And they can borrow money from financial institution with lowest cost. After purchase with in 15 days they pay the cash and take discount. Those needed money they can borrow from other lenders.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A firm has the following choices to finance its inventory purchase: •Credit terms of 1/20 net...

A firm has the following choices to finance its inventory purchase: •Credit terms of 1/20 net 40 EOM •A single payment note with $500,000 principal and an 7.5% annual interest rate payable in 40 days •A discount loan with $500,000 principal and 6.95% annual interest rate payable in 40 days 1.Explain what the credit terms mean. 2.Calculate the cost of not taking the discount. 3.Calculate the annualized cost of (a) the single payment note and (b) the discount loan. 4.Of...

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

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?

A large retailer obtains merchandise under the credit terms of 2/15, net 45, but routinely takes...

A large retailer obtains merchandise under the credit terms of 2/15, net 45, but routinely takes 55 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer's effective cost of trade credit? Assume 365 days in year for your calculations. Do not round intermediate calculations. Round your answer to two decimal places.

Gold Star Industries is contemplating a purchase of computers. The firm has narrowed its choices to...

Gold Star Industries is contemplating a purchase of computers. The firm has narrowed its choices to the SAL 5000 and the HAL 1000. The company would need seven SALs, and each SAL costs $3,150 and requires $360 of maintenance each year. At the end of the computer’s eight-year life, each one could be sold for $175. Alternatively, the company could buy eight HALs. Each HAL costs $3,650 and requires $415 of maintenance every year. Each HAL lasts for six years...

Gold Star Industries is contemplating a purchase of computers. The firm has narrowed its choices to...

Gold Star Industries is contemplating a purchase of computers. The firm has narrowed its choices to the SAL 5000 and the HAL 1000. The company would need six SALs, and each SAL costs $3,650 and requires $390 of maintenance each year. At the end of the computer’s eight-year life, each one could be sold for $190. Alternatively, the company could buy five HALs. Each HAL costs $3,800 and requires $445 of maintenance every year. Each HAL lasts for six years...

A large retailer obtains merchandise under the credit terms of 2/15, net 30, but routinely takes 60 days to pay its bills.

Cost of Trade CreditA large retailer obtains merchandise under the credit terms of 2/15, net 30, but routinely takes 60 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer's effective cost of trade credit? Assume 365 days in year for your calculations. Do not round intermediate calculations. Round your answer to two decimal places.%

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...

Nike is considering changing its credit terms from “net 60” to “net 30” in its western...

Nike is considering changing its credit terms from “net 60” to “net 30” in its western Ohio sales territory. The company expects sales (all on credit) to decrease by 10% from a current level of 4 million, and it expects its average collection period to decrease from 70 days to 38 days. The bad-debt ratio should decline to 2.5% of sales from a current level of 5% of sales. The company also estimates that inventory investment would decrease by $100,000...

A customer applies for credit at your firm. Your terms are net 35 days. The customer’s...

A customer applies for credit at your firm. Your terms are net 35 days. The customer’s D&B report reveals that he pays on the net date only 10% of the time. He pays 30 days late 60% of the time, he pays 60 days late 20% of the time, and he pays 90 days late 10% of the time (with necessary assistance being provided by a collection agency). The item he wishes to buy has an invoice price of $2,000...

Homework #3 - Accounts Receivable Bey Technologies is considering changing its credit terms from 2/ 15,...

Homework #3 - Accounts Receivable Bey Technologies is considering changing its credit terms from 2/ 15, net 30 to 3/ 10, net 30 to speed collections. Currently, 40 percent of Bey’s paying customers take the 2 percent discount. Under the new terms, discount customers are expected to rise to 50 percent. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late....

Subjects