Question

if a firm has discounts available and would need to borrow funds to pursue the discounts, should it do so? Why or why not?

Answer 1

The firm need to do a cost and benefit analysis.

Borrowing fund is not free of cost. Interest will have to be paid on fund borrowed. At the same time when fund are borrowed to pay Supplier to avail discount the discount becomes a benefit that will be achieved.

If the benefit achieved is more than cost of interest then it is better to do so and if cost of interest is more than benefit then this should not be done.

Summery-

1. The firm should do so if cost of interest is lower than benefit achieved.
2. The firm should not do so if cost of interest is higher than benefit achived.