Question

The expression "5/10, net 45" means that the customers receive a 5% discount if they pay within 10 days; otherwise, they must pay in full within 45 days. What would the seller’s cost of capital have to be in order for the discount to be cost justified?

Answer 1

The seller's cost of capital would have to be 4% or higher for the discount to be cost-justified.

Step-by-step explanation:

In order for the discount to be cost justified, the seller's cost of capital would have to be equal to or higher than the effective rate of return the firm would invest at. Let's calculate the effective rate of return using the information provided:

1. The customers receive a 5% discount if they pay within 10 days.
2. Otherwise, they must pay in full within 45 days.
3. The cost of financial capital for the firm is 9%.
4. The firm can capture the 5% return to society.

Based on this information, the effective rate of return for the firm would be 4%.

Therefore, the seller's cost of capital would have to be 4% or higher for the discount to be cost-justified.

Answer 2

Ans. The seller´s cost of capital has to be 70.73% annual in order to justify this 5% discount if bills are paid within 10 days.

Step-by-step explanation:

Hi, in order for discount to be justified, the seller´s cost of capital must be equal or higher than the cost of this discount, and to find this amount, we must use the following formula.

`DiscountCost=(1+(Discount)/(1-Discount)) ^{(365)/(DaysToPay-DiscountPeriod) } -1`

Where the discount is presented in its decimal form. So it should look like this.

`DiscountCost=(1+(0.05)/(1-0.05)) ^{(365)/(45-10) } -1=0.7073`

That is 70.73% annual.

Best of luck.