A supplier (Supplier Ltd.) has offered its client (Customer Ltd.) a trade credit terms of 2/10, net 40.

Required:

a. Interpret the credit terms offered by Supplier Ltd. [1 mark]

b. From the perspective of Supplier Ltd., what is the cost of extending such trade credit to Customer Ltd., if Customer Ltd. takes full advantage of the discount? Explain your answer. [1 mark]

c. From the perspective of Customer Ltd., what is the effective annual cost of forgoing the trade credit? Assume 360 days in a year. [2 marks]

d. If Customer Ltd. can obtain a bank loan at 18% EAR, should Customer Ltd. take the advantage of the discount? Explain your answer. [1 mark]

e. The account payable days outstanding for Customer Ltd. is revealed to be 13.6 days. Is Customer Ltd. managing its account payables effectively? Explain your answer. [1 mark]