ACD, Inc. a computer parts company, presently pays its largest supplier by check and is trying to determine whether to switch to electronic payment. Its present credit period is 45 days. Its opportunity cost for funds is a 12% annual rate. The disbursement float on its checks averages 4 days. It estimates the variable cost per check to be $8.35. Its average payment to the supplier is $20,000. Using ACH debits initiated by its supplier would result in per-payment charges of $3 and clearance float of 1 day. Its supplier has generously agreed to pay any switchover costs necessary to make ACD “financial EDI-ready”. The credit period for electronic payments would be 48 days.
a. Should ACD switch to electronic payments?
b. ACD decides not to go with the switchover. One year later, the supplier approaches ACD again and asks for a reconsideration. What are the present values of check and electronic payment if the annual opportunity rate on funds has dropped to 8%? How does this affect the relative attractiveness of electronic payments.
c. Is there any reasonable opportunity cost of funds (i.e, less than 30%) for which your recommended payment method would change?