Question

QUESTION 3: CASE STUDY 3 (10%)

Cole Property Management Company

Cole Property Management Company received a bill for RM103, 500 with payment terms 3/20, n/30. Samantha Cole, the owner of the company, knows that she will not have enough money in her business checking account to pay the bill within 10 days and take the early payment discount. In fact, assume that she has nothing in her account, not a single penny. Samantha has a good credit, so her bank is willing to lend her all the money to pay the bill in 20 days. They charge an interest rate of 8% and they use ordinary simple interest.

1)Assume that on exactly the day that the bill is due (n/30), Samantha will have collected enough money from the renters and buyers in her apartment units to pay either the invoice or a loan.

2)What should she do, borrow the money from the bank or pay the invoice on the 30^th day when she has money in her account?

Answer 1

This question is solved using the concept of cost-benefit analysis. If Samantha Cole should borrow the money from the bank then Interest for 10 days is considered as a cost. And discount received from early payment is considered as benefits.
Benefits if borrow the money from the bank (103500*3%)	RM 3,105
Cost if borrow the money from the bank (103500*8%*10days / 360 days)	RM 230
Net Benefits	RM 2,875

Here we can consider 1 year = 360 days.

It is advisable to borrow the money from the bank to take the early payment discount.

If a company want to get cash discount then it required to made payment within 20 days. Otherwise, payments made within 30 days as per credit terms conditions.

Company wants to get cash discount but Company has no money on hand to make payments on 20 days.

So the company can borrow RM 103500 money from the bank on 20th days. And company made payment to bank on 30th days with interest. After borrowing money the company gets money from the bank. Same money paid to the supplier to get a cash discount of RM 3105 =(103500*3%). It is benefits to the company.

Now on 30th days, company made payment to the bank with interest of RM 230. Interest applicable only 10 days. Because money borrowed on 20th days and paid on 30th days. (30-20= 10days)

Interest is an additional cost to the company of RM 230 but the Company also receives cash discount from supplier Rm 3105. Then bet benefits from the option of borrowing from bank = 3105-230= RM 2875