What is the average amount of accounts payable net of discounts? (Assume the $3.65 million of purchases is net of discounts—that is, gross purchases are $3,724,489.80, discounts are $74,489.80, and net purchases are $3.65 million.) Is there a cost of the trade credit the firm uses? If the firm did not take discounts but did pay on the due date, what would be its average payables and the nominal and effective costs of this nonfree trade credit? What would be the firm’s nominal and effective costs of not taking discounts if it could stretch its payments to 40 days?
Suppose a firm makes purchases of $3.65 million per year under terms of 2/10, net 30, and takes discounts.
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What is the average amount of accounts payable net of discounts? (Assume the $3.65 million of purchases is net of discounts—that is, gross purchases are $3,724,489.80, discounts are $74,489.80, and net purchases are $3.65 million.)
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Is there a cost of the trade credit the firm uses?
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If the firm did not take discounts but did pay on the due date, what would be its average payables and the nominal and effective costs of this nonfree trade credit?
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What would be the firm’s nominal and effective costs of not taking discounts if it could stretch its payments to 40 days?
In Order to get Payment on time, the seller Provides a Certain percentage of the discount to the Purchaser . In the given question, if the firm pays within the 10 days from the day of purchase then it will get the discount of 2%
Formulas
Average Amount of Accounts Payable net of discounts = Net Accounts Payable/Number of days in a period x No of days to pay to avail discount
Nominal cost = Discount/(Average Amount of Accounts Payable net of discounts if discount not availed - Average Amount of Accounts Payable net of discounts if discount availed)
Effective cost = (1 + Discount /Net Accounts Payable) No of Days in a year/No of days to pay after discount is finished-1
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