Question

Your company iust bought $125000 in goods from your supplier on trude credit terms 1/10 net 50 . Your opportunity cost of funds is 12π. a. On willoh tarias should you pary? b. If your mopplioria now ofiering a 4. discount if the puymany in cun delivery. Otherwise, you get net 50 days. What should you do under thesat terms?

Answer 1

To make the optimal payment decision, compare the discount amount to the opportunity cost of funds. If the discount is greater, pay early. If a 4% discount is offered for cash on delivery, take advantage of it.

Step-by-step explanation:

a. The trade credit terms are 1/10 net 50, which means that you can receive a 1% discount if you pay within 10 days, otherwise the full payment is due within 50 days. To determine whether to take the discount and pay early, you need to compare the discount amount to your opportunity cost of funds. In this case, your opportunity cost of funds is 12%. If the discount amount is greater than your opportunity cost of funds, it would be advantageous to pay early.

b. If the supplier is offering a 4% discount for cash payment at delivery, it would be even more advantageous to take this discount since it is greater than your opportunity cost of funds. Therefore, you should pay cash on delivery to receive the 4% discount.