paladin enterprisis manfactures printing presses for small town newspaper that a

Question

paladin enterprisis manfactures printing presses for small town newspaper that are often short of cash to accommodate thease customers paladin offers the following payment terms.

1/3 on deverly,1/3 after six months,1/3 after 18 months
a) what discount is impiled by the terms from paladin point of view if it can invest excess funds at 8% compounded quartely
b) the sentinel can borrow liited amounts of money at 12% compounded monthly, what discount do the payment terms imply to the sentinel.

c) reconciel thease different views of the same thing in opportunity cost.

Explanation / Answer

SOLUTION: Assume a price of $300. a. PV = $100 + $100 [PVF2,2] + $100 [PVF2,6] = $100 + $100 (.9612)+ $100 (.8880) = $284.92 Discount = $15.08/$300 = 5% b. PV = $100 + $100 [PVF1,6] + $100 [PVF1,18] = $100 + $100 (.9420)+ $100 (.8360) = $277.80 Discount = $22.20/$300 = 7.4% c. The buyer is avoiding more financing cost than the seller is giving up because funds are available to both of them at different opportunity rates.

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