Question

Calculate the present value savings associated with paying on the last day of the discount trade credit period, as compared to the last day of the net trade credit period. Assume a $40,000 purchase is made from a supplier that offers trade credit terms of 2/10 net 30. Also, assume a discount rate of 5%. PLEASE SHOW ALL WORK

A. $39,836.29

B. $39,836.29

C. $689.92
D. $-689.92

Answer 1

PV of Savings = PV of Cashflow when paidon 30 days - PV of CFs when paid on 10 days

PV of Cashflow when paidon 30 days = Cash flow * PVF (0.411%, 1 )

= 0.411% = 5% * 30 / 365

= $ 40000 * 0.9959

= $ 39836.29

PV of CFs when paid on 10 days = $ 39200 * PVF(0.137% , 1 )

0.137% = 5% * 10 / 365

= $ 39200 * 0.9986

= $ 39146.37

PV of Savings = PV of Cashflow when paidon 30 days - PV of CFs when paid on 10 days

= $ 39836.29 - $ 39146.37

= $ 689.92

Present Value Factor:
PVF(r%, n) = 1 / ( 1 + r )^n
r = Int Rate per period
n = No. of periods

OPtion C is correct.
Pls comment, if any further assistance is required.