Paladin Enterprises manufactures printing presses for small-town newspapers that are often short of cash. To accommodate these customers, Paladin offers the following payment terms.
1/3 on delivery
1/3 after six months
1/3 after 18 months
The Littleton Sentinel is a typically cash-poor newspaper considering one of Paladin’s presses.
a. What discount is implied by the terms from Paladin’s point of view if it can invest excess funds at 8% compounded quarterly?
b. The Sentinel can borrow limited amounts of money at 12% compounded monthly. What discount do the payment terms imply to the Sentinel?
c. Reconcile these different views of the same thing in terms of opportunity cost.