Question

Melva has just received an invoice from a vendor offering a 2% discount if they pay within 10 days. Should Melva pay in the time frame even if they need to borrow the money to cover the payment?

Answer 1

Melva should consider the cost of borrowing the money compared to the savings from the 2% discount before deciding whether to pay in the time frame.

Step-by-step explanation:

If Melva needs to borrow money to cover the payment, it's important to consider whether the amount saved by taking advantage of the 2% discount is greater than the cost of borrowing the money. To determine this, Melva should compare the interest expenses of borrowing the money to the amount of money saved by paying within the 10-day discount period.

For example, if Melva needs to borrow $1,000 to make the payment and the interest rate on the loan is 5%, the interest expense would be $50 for a year. If the discount on the invoice is 2%, Melva would save $20 by paying within the 10-day period. In this case, it may not be financially advantageous to borrow the money to take advantage of the discount.

Therefore, Melva should carefully consider the interest rate and period of borrowing before deciding whether to pay in the time frame or not. If the interest expense is significantly higher than the discount, Melva may be better off not borrowing the money and paying within the regular payment terms.