Question

2. Describe how the company should evaluate the decision below:

a. A firm is trying to determine when to make payment on an account payable for which the supplier offers a cash discount.

Provide enough information in your answers to demonstrate your understanding, but do not feel obligated to fill the entire space or to provide information unrelated to the question. For some explanations, it may be sufficient to provide the equation used for the analysis together with an explanation of the meaning of the variables in that equation.

Answer 1

A firm should make payment to to its creditors who offers with cash discount at the time of purchase of goods.

A firm should evaluate between whether the discount provided on on a purchase of goods through cash payments is higher than time value of money of credit period it is provided with to pay them when not availing discount.

Generally in such scenario a firm has to evaluate between two situation which could be discount offered on such purchases is higher if the payment is made up front and time value of money and when the payment is made late.

If the cash discount is higher than the time value of money of credit period ,firm should pay immediately which makes them eligible for cash discount.

If the time value of money of credit period is higher then cash discount ,firm should not opt for cash discount.