You are currently re-evaluating your payables policy. Your current suppliers offer terms of 1.5/10, net 40 with a late payment fee of 1.5 percent per month. A supplier wanting your business is willing to offer terms of 2.5/5, net 60 with no stated late payment fee. Your annual borrowing rate is 18 percent. Assume a 365 day year.
a. How long should you delay payment given the terms of your current suppliers? Prove your answer by relating the annualized cost of the discount to your investment or borrowing rate.
b. How long should you delay payment given the terms of the competing supplier? Prove your answer by relating the annualized cost of the discount to your investment or borrow¬ing rate.
c. Based on an average invoice of $100,000, which supplier should you purchase from, i.e., which set of terms results in the minimum net present value cost?