ABC Co. has a credit purchase of P40,000 with terms 2/10 net 30 with its supplier. Based on past experience, ABC Co. can manage to pay on the 40t day without penalty. The management of ABC Co. is pondering whether to avail the discount or not. ABC Co. has the following options of raising cash in case it wants to avail the discount: A. Convert its short term investments which is currently earning 14% per year. Transaction cost is estimated at 2%.
ABC Co. has a credit purchase of P40,000 with terms 2/10 net 30 with its supplier. Based on past experience, ABC Co. can manage to pay on the 40t day without penalty. The management of ABC Co. is pondering whether to avail the discount or not. ABC Co. has the following options of raising cash in case it wants to avail the discount: A. Convert its short term investments which is currently earning 14% per year. Transaction cost is estimated at 2%.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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ABC Co. has a credit purchase of P40,000 with terms 2/10 net 30 with its supplier. Based on past experience, ABC Co. can manage to pay on the 40t day without penalty. The management of ABC Co. is pondering whether to avail the discount or not. ABC Co. has the following options of raising cash in case it wants to avail the discount:
A. Convert its short term investments which is currently earning 14% per year. Transaction cost is estimated at 2%.
B. Obtain a P40,000 discounted loan from PI which offers a discounted loan for 20 days at a cost of P320.
IF the management makes the right decision, how much is the least possible cost
(expressed in % to be incurred related to the trade credit?
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