Question

Early Payment discount decisions   Prairie Manufacturing has four possible​ suppliers, all of which offer different credit terms. Except for the differences in credit​ terms, their products and services are virtually identical. The credit terms offered by these suppliers are shown in the following​ table: (Note​: Assume a​ 365-day year.)

Supplier	Credit Terms
J	2/10 net 50 EOM
K	2/20 net 100 EOM
L	3/15 net 60 EOM
M	3/20 net 90 EOM

a. Calculate the approximate cost of giving up the cash discount from each supplier.

b. If the firm needs​ short-term funds, which are currently available from its commercial bank at 10​%, and if each of the suppliers is viewed separately​, ​which, if​ any, of the​ suppliers' cash discounts should the firm give​ up?  

c. Now assume that the firm could stretch by 30 days its accounts payable​ (net period​ only) from supplier M. What​ impact, if​ any, would that have on your answer in part b relative to this​ supplier?

Answer 1

I have answered the question below

Please up vote for the same and thanks!!!

Do reach out in the comments for any queries

Answer:

a). Calculation of the approximate cost of giving up the cash discount from each supplier.
J = 2% * 365/40 = 18.25%
K = 2% * 365/80 = 9.13%
L = 3% * 365/45 = 24.33%
M = 3% * 365/70 = 15.64%

b).The firm should give up K because the cost of giving it up is less than the banks 10%.

c). If the firm could strech account payables from supplier M by 30 days. then the cost of giving up cash discount will be still greater than 10% hence decision cannot be changed and firm can give up K because the cost of giving it up is less and also less than 10%.