The Trim Gym recently purchased a new security system for $5,500. The transaction was made on trade credit terms of net 45 days. The billing office has offered the Trim Gym a 0.25% discount if the payment is made with an ACH. The financial manager at the Trim Gym notes that t he ACH provides 1 day of float, while a check would provide 3 days of float. The additional float might be helpful since the Trim Gym’s cost of capital is 9%.
a. Determine whether or not the Trim Gym should repay the accounts payable with an ACH or check. Assume that the financial manager wants to disregard the cost differential between the ACH and check (because it’s a one-time transaction and because the difference is so small).
b. At what discount would the Trim Gym be indifferent between the disbursement methods?