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Your firm purchases goods from its supplier on terms of 2
Your firm purchases goods from its supplier on terms of 2.1/15, net 35.
a. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 35??
b. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 45??
Expert Solution
Computation of Effective Annual Cost:
Effective Annual Cost = (1+Discount/(100 - Discount))^(365/(Payment Days - Discount Period)) - 1
a) If firm chooses not to take the discount and makes its payment on day 35:
Here,
Discount = 2.1
Payment Days = 35
Discount Period = 15
So,
Effective Annual Cost = (1+2.1/(100-2.1))^(365/(35 - 15)) - 1 = 47.30%
b) If firm chooses not to take the discount and makes its payment on day 45?:
Here,
Discount = 2.1
Payment Days = 45
Discount Period = 15
So,
Effective Annual Cost = (1+2.1/(100-2.1))^(365/(45 - 15)) - 1 = 29.46%
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