Question

Company ABC just bought $100,000 of supplies from its supplier. Credit terms are 2/15, net 45. Answer questions a-f in the space below:

a) How much will ABC pay for the supplies if it pays in 15 days?

b) How much will it pay if it pays in 45 days?

c) How many days is the free credit period?

d) How many days is the nonfree credit period?

e) What is the annualized cost of forgoing the discount?

f) Should you pay in 15 days and get the discount or wait to pay for 45 days?

Answer 1

a) How much will ABC pay for the supplies if it pays in 15 days?

Amount to be paid = invoice * (1 - Discount) = 100000 * (1 - 2%) = $98000

b) How much will it pay if it pays in 45 days?

Amount to be paid = Invoice Amount = $100000

c) How many days is the free credit period?

Free Credit Days = 15 days

d) How many days is the nonfree credit period?

Non Free Credit Days = Total Credit Days - Free Credit days = 45 - 15 = 30 days

e) What is the annualized cost of forgoing the discount?

Annualized Cost = Discount * 365 / 15 = 48.67%

f) Should you pay in 15 days and get the discount or wait to pay for 45 days?

it is recommended to pay in 15 days and to get discount as it saves money

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