Self-Test Problem

(Solutions in Appendix)

  1. Learning Goals 1, 2

    ST16–1 Early payment discount decisions The credit terms for each of three suppliers are shown in the following table. (Note: Assume a 365-day year.)

    Supplier Credit terms
    X 1/10 net 55 EOM
    Y 2/10 net 30 EOM
    Z 2/20 net 60 EOM
    1. Determine the approximate cost of giving up the early payment discount from each supplier.

    2. Assuming that the firm needs short-term financing, indicate whether it would be better to give up the discount or take the discount and borrow from a bank at 15% annual interest. Evaluate each supplier separately using your findings in part a.

    3. Now assume that the firm could stretch its accounts payable (net period only) by 20 days from supplier Z. What impact, ...

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