Question

24.  

(LO 24.4)

a.  

Calculate the effective annual cost of forgoing the discount from credit terms of 2/15 net 60. The selling price is $800.

b.  

Another supplier offers $820 on credit terms of net 90. If you could finance the purchase by using loans at an effective annual cost of 10 percent for part (a), which option should you choose?

Answer 1

a]	Effective annual cost = (1+2/98)^(365/45)-1 =	17.81%
b]	Amount to be paid on the 15th day, if, discount is taken
	from the supplier at [a] = 800*98% =	$                 784
	Amount to be paid on the 90th day, if, supply is taken
	from the second supplier =	$                 820
	So, the difference amount of 820-784 = 36, is the cost
	of not paying 784 on the 15th day. Hence, the effective
	cost of not taking the discount from the first supplier
	and paying on the 90th day = (1+36/784)^(365/75)-1 =	24.42%
	If loans are available at EAC of 10%, the option [a]
	should be chosen. That is buying from the supplier at
	[a] and availing cash discount by paying on the 15th day.