Question 1) A supplier is offering you firm a cash discount of 2 percent if purchses are paid for within ten days otherwisse the bill is due at the end of sixty days. Would you recommend borrowing from a bank at an 18 percent annual interst rate to take advantage of the cash discount offer? Explain.
Question 2) Assume that you have been offered cash discounts on merchandise that can be purchaed from either of two suppliers. Supplier A offers trade credit terms of 3/20, net 70, while supplier B offers 4/15, net 80. What is the approximate effective cost of missing the cash discounts form each supplier? If you not take advantage of either cash discount offer, which supplier who you select?
Question 3) Compute the effective cost of not taking the cash discount under the following trade credit terms:
a) 2/10 net 40
b) 2/10 net 50
c) 3/10 net 50
d) 2/20 net 40
Question 4) What conclusion can you make about credit terms from reviewing your solutions in problem 3?