Laguna Memorial Hospital (LMH) buys $800,000 in Personal Protective Equipment (PPE) each year from Colorado Medical Supply Corporation (CMSC), which offers LMH terms 3.2/20, net 60. Currently, LMH is paying the supplier the full amount due on Day 60, but it is considering taking the discount, paying on Day 20 and replacing the trade credit with a bank loan that has a 6 percent annual cost. Assume 360 days per year. a. what is the amount of free trade credit that LMH obtains from CMSC? b. What is the amount of costly trade credit? c. What is the approximate annual cost of the costly trade credit? d. Should LMH replace its trade credit with the bank loan? Please explain.

Laguna Memorial Hospital (LMH) buys $800,000 in Personal Protective Equipment (PPE) each year from Colorado Medical Supply Corporation (CMSC), which offers LMH terms 3.2/20, net 60. Currently, LMH is paying the supplier the full amount due on Day 60, but it is considering taking the discount, paying on Day 20 and replacing the trade credit with a bank loan that has a 6 percent annual cost. Assume 360 days per year. a. what is the amount of free trade credit that LMH obtains from CMSC? b. What is the amount of costly trade credit? c. What is the approximate annual cost of the costly trade credit? d. Should LMH replace its trade credit with the bank loan? Please explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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