A company can buy inventory on credit terms of 1/10, net 45. What is the cost of using this vendor as a source of financing? Should they discount or pay on the net date if their bank line has a cost of 10.00%?
A company can buy inventory on credit terms of 1/10, net 45.
Credit terms 1/10 net 45 means
1% discount if paid within 10 days or net within 45 days.
The vendor offers some discount to motivate early payment.
Effective Annual Rate (vendor) = 10.39%
The cost of using the vendor as a source of financing is 10.39%.
Bank loan has a cost of 10.00%.
The cost of using the vendor as a source of finance is 10.39% which is higher than the bank loan.
The company should take the bank loan and pay on the net date.
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