Three suppliers offer Ruby Co. different credit terms. Bandy Co. offers terms of 1.5/15, net 30. Carryl Co. Offers terms of 1/10, net 30. Platt Co. offers terms of 2/10, net 60. Ruby Co. would have to borrow from a bank at an annual rate of 10% to take any cash discounts. Based on a 360-day year, which of the following options would be most attractive for Ruby Co.?
a.Purchase from Platt Co., pay in 60 days, and do not borrow from the bank.
b.Purchase from Bandy Co., pay in 15 days, and borrow from the bank.
c.Purchase from Carryl Co., pay in 10 days, and borrow from the bank.
d.Purchase from Bandy Co., pay in 30 days, and do not borrow from the bank.
Answer:B
Choice “b” is correct.
The requirement is to determine the most attractive terms. Answer (b) is correct because the most attractive option would be to purchase from Brandy, pay in 15 days, and borrow from the bank. The nominal annual benefit of taking Brandy’s terms is equal to 36.5% (1.5%/(100% -1.5%) *360 days/(30days - 15 days)).
Answer (a) is incorrect because the nominal annual cost of not taking Platt’s terms is equal to 14.7% (2%/(100% - 2%)) *(360 days /(60 days - 10 days)), which is less than the benefit from taking Brandy’s terms.
Answer (c) is incorrect because the nominal annual cost of not taking Carryl’s terms is equal to 18.2% (1%/(100% - 1%) *360 days /(30 days - 10 days)) which is less than the benefit from taking Brandy’s terms.
Answer (d) is incorrect because the company would benefit from taking Brandy’s discount terms.