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Suppose a firm makes purchases of $3.65 million per year under terms of 2/10, net 30, and takes discounts. a. What is the average amount of accounts payable net of discounts? (Assume that the $3.65 million of purchase is net of discounts – that is, gross purchases are $3,724,490 and discounts are $74,490). b. Is there a cost of the trade credit the firm uses? c. If the firm did not take discounts but it did pay on the due date, what would be its average payable balance and what would be the cost of this non-free trade credit? d. What would its cost of not taking discounts be if it could stretch its payments to 40 days?

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Nelly Stracke
Nelly StrackeLv2
28 Sep 2019

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Suppose a firm makes purchases of Rs 10.95 million per year under terms of 2/10, net 30, and takes discounts.                                                                                                                

  1. What is the average amount of accounts payable net of discounts? (Assume the Rs 10.95 million of purchases is net of discounts—that is, gross purchases are Rs 11,173,469.40, discounts are Rs 223,469.40, and net purchases are Rs 10.95 million.)
  2. Is there a cost of the trade credit the firm uses?
  • If the firm did not take discounts but did pay on the due date, what would be its average payables and the cost of this nonfree trade credit?
  1. What would be the firm’s cost of not taking discounts if it could stretch its payments to 40 days?
Lamar Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 60; and it currently pays after 5 days and takes discounts. Lamar plans to expand, which will require additional financing. If Lamar decides to forgo discounts, how much additional credit could it get and what would be the nominal and effective cost of that credit? If the company could get the funds from a bank at a rate of 10%, interest paid monthly, based on a 365-day, what would be the effective cost of the bank loan, and should Lamar use bank debt or additional trade credit? Explain.

Please work the problem fully.

Cost of Trade Credit and Bank Loan

Lamar Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 50; and it currently pays after 5 days and takes discounts. Lamar plans to expand, which will require additional financing. Assume 365 days in year for your calculations.

a. If Lamar decides to forgo discounts, how much additional credit could it obtain? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.
$ __________

b. What would be the nominal cost of that credit? Round your answer to two decimal places.

___________%

c. What would be the effective cost of that credit? Round your answer to two decimal places.

___________ %

d. If the company could get the funds from a bank at a rate of 7%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Round your answer to two decimal places.
___________%

e. Should Lamar use bank debt or additional trade credit?
Bank debt or Addtional trade credit

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