I need help with this question. Justso Ltd buys on terms 1.5/10, net 30 days. It
ID: 2657414 • Letter: I
Question
I need help with this question.
Justso Ltd buys on terms 1.5/10, net 30 days. It does not take discounts, but it typically pays 20 days after the invoice date, instead of waiting until Day 30. Justso can borrow from the bank at a rate of 18% per annum. (a) If Justso is not taking discounts and is paying on Day 20, what is the effective annual cost of the firm?s current practice, using a 360-day year? (b) Please advise Justso Ltd on its cheapest course of action if the firm's suppliers do not take action on outstanding accounts unless they remain unpaid 80 days after the date of the invoice. Please back your advice up with appropriate calculations. (c) Please advise Justso Ltd on its cheapest course of action if the firm?s suppliers take action on outstanding accounts when they remain unpaid at the start of the 31st day after the date of the invoice. Please back your advice up with appropriate calculations. Please show all work.
Explanation / Answer
a If Justso is not taking discounts and is paying on Day 20, what is the effective annual cost of the firm?s current practice, using a 360-day year? If Justso pays within 10 days the discount would be Discount 0.015 (1-Discount) 0.985 Rate of Interest for 10 days is 0.015/0.985 0.015228 0.0152 Effective annual cost 0.0152*360/10 0.548223 54.82% b Please advise Justso Ltd on its cheapest course of action if the firm's suppliers do not take action on outstanding accounts unless they remain unpaid 80 days after the date of the invoice. If Justo can repay upto 80 days without any adverse action from supplier Effective Annual rate = 0.0152*(360/70) 0.078318 7.83% Since the effective annual rate is 7.83% and the cost of borrowing is 18%, Justo should not avail the discount c Please advise Justso Ltd on its cheapest course of action if the firm?s suppliers take action on outstanding accounts when they remain unpaid at the start of the 31st day after the date of the invoice. 0.0152*360/20 0.2736 27.36% As the borrowing cost is ony 18% and effective annual cost is 27.36%, Justo should make payment within 10 days