Your computer manufacturing firm must purchase 12,000 keyboards from a supplier.

Question

Your computer manufacturing firm must purchase 12,000 keyboards from a supplier. One supplier demands a payment of $144,000 today plus $12 per keyboard payable in one year. Another supplier will charge $25 per keyboard, also payable in one year. The risk-free interest rate is 8%. a. What is the difference in their offers in terms of dollars today? Which offer should your firm take? b. Suppose your firm does not want to spend cash today. How can it take the first offer and not spend $144,000 of its own cash today?

Explanation / Answer

P.V of Supplier 1 cost $144000+$12*(12000/1.08) $ 2,77,333.33 P.v of Supplier 2 cost $25*(12000/1.08) $ 2,77,777.78 P. V of supplier 1, cost is lower than supplier 2 cost, so it is better to accept offer of supplier 1. If amount borrowed from bank to make initial payment @ 8% for one year=($144000*8%)+$$144000 $                              1,55,520.00 Add: Cost of Supplier 1=(12000*$12) $                              1,44,000.00 Total Cost $                              2,99,520.00 Second Supplier cost=(12000*$25) $                              3,00,000.00 So the cost of 1st offer is less than second i.e,$299520 is less than $300000

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