Question

Question 3

Lawrence Industries,operator of a small chain of video stores, purchased $ 1000 worth of merchandise on February 27 from a supplier extending terms of 2/10 net 40 EOM. If the firm takes the cash discount, it must pay $980 [$1000 - (0.02 - $1,000)] by March 10, thereby saving $20. If they decide not to take the cash discount, what will be their cost of giving up cash discount? If there is any available loan that requires a return of 12.5%, should the company take the cash discount?

b. Tenney Company, a large janitorial service company, currently pays its employees at the end of each month. The monthly payroll totals $1,600,000. If the firm were to extend the pay period so as to pay its employees 1 week later throughout an entire year, how much the employees would in effect be lending the firm for a year? The firm has potential to earn 12% on their investment Required: What is the total amount that Tenney Company can save yearly throughout new payment policy?

Answer 1