You plan to place an order with a new supplier. You have been offered terms of 2/10, net 50 from the date your supplies are shipped. The cost of borrowing from the bank is 15 percent on an annual basis. What is the best course of action in paying the supplier, assuming the firm will need to borrow if it takes the discount?
A)Pay as soon as supplies are received.
B)Pay on the 10th day.
C)Pay on the 50th day.
D)Pay on the 51st day.

Question

Quizplus · Accepted Answer

Taking the discount of 2% for paying within 10 days is equivalent to an annual rate of 36.7% ([(1/0.98)^(365/40)]-1), which is much higher than the cost of borrowing from the bank at 15%. Therefore, it is best to pay on the 10th day to take advantage of the discount and save money.

You Plan to Place an Order with a New Supplier