1) The firm you work for has asked you to evaluate the payables policy. Your exi

Question

1) The firm you work for has asked you to evaluate the payables policy. Your existing

supplier offers terms of 3/10, net 30 with an annualized late payment fee of 18% but

would only allow you to pay 30 days late. A new supplier seeking your business is

offering the terms of 1/5, net 60 with an annualized late payment fee of 15% but

would only allow you to pay 20 days late. Your annual borrowing rate is 16%.

Assume 365 days in a year. Base your analysis on a $100,000 each time purchase.

a) Generate the NPV (cost) values on excel for the 60 day period for the existing
supplier.
b) Generate the NPV (cost) values on excel for the 80 day period for the new
supplier

e) Would you pay late for either supplier and why?

f) Which supplier would you pick and why?

Explanation / Answer

Particulars Actutal Amount Discounted Value@16% Purchase Amount 100000 Existing Supplier cash within 10days=(1-0.03)*100000 97000 97000 Existing Supplier on credit 30days=100000(1+0.18/12) 101500 100182.53 Existing Supplier on credit 60days=100000(1+0.18/12) 103000 100360.38 New Supplier cash within 5days=(1-0.01)*100000 99000 99000.00 New Supplier on credit with 20days =100000*(1+0.015*20/365) 100082.19 100959.62 New Supplier on credit with 80days =100000*(1+0.015*20/365) 100328.77 96929.59 a) Generate the NPV (cost) values on excel for the 60 day period for the existing 100360.3844 supplier. b) Generate the NPV (cost) values on excel for the 80 day period for the new 96929.59238 supplier e) Would you pay late for either supplier and why? No , in both the cases cash amount is lower than credit amount. f) Which supplier would you pick and why? Continue with the existing supplier as in both cash and credit it is lower than the new one.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.