Customer X purchases 10,000 of goods from Company Y with the usual two months credit period. In
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Customer X purchases €10,000 of goods from Company Y with the usual two months’ credit period. In addition, Y offers a 10% discount for immediate payment. Y is aware that X is a risky customer and estimates a 5% probability of default each month. The expected monthly cost of servicing the account is €100. Is the discount a good idea from the seller’s point of view? Assume that X can borrow at 20% and Y can borrow at 10% per annum. Show your computations.
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