week 13A supplier is offering your firm a cash discount of 2 percent i

QUESTION

week 13A supplier is offering your firm a cash discount of 2 percent ifpurchases are paid for within ten days; otherwise the bill is due atthe end of sixty days. Would you recommend borrowing from abank at an 18 percent annual interest rate to take advantage of thecash discount offer? Explain
Supplier is offering your firm a cash discount of 2 percent if purchases are paid for within ten days; otherwise the bill is due at the end of sixty days. This means the customers have 60 days from the invoice date to pay the full amount. However, if payment is made within 10 days, a 2 percent cash discount can be taken. Consider a buyer who places an order for $1,000, and assume that the terms of the sale are 2/10, net 60.

The buyer has the option of paying $1,000 * (1-0.02) = $980 in 10 days, or paying the full $1,000 in 60 days. If the terms were stated as just net 30, then the customer would have 30 days from the invoice date of pay the entire $1,000 and no discount would be offered for early payment.

ANSWER:

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