a) What does the term 2/10, net 30 mean? (1.5 marks)

b) FIN222 Ltd purchases supplies on terms of 1/10, net 30. If FIN222 Ltd chooses to take the discount offered, it must obtain a bank loan to afford it. WES bank has quoted an APR of 15% on borrowed funds. (3.5 marks)

i) Once FIN222 Ltd passes the discount period, how much cost will it incur in an annual term?

ii) Calculate the EAR for WES bank.

iii) What should FIN222 Ltd do?

c) Use the following information to answer the questions.

• PVT Limited buys $15,000 of raw materials and inventory from its suppliers, purchasing them on credit, which means that the firm does not have to pay cash immediately at the time of purchase.
• About 17 days later, PVT Limited pays for the materials and inventory.
• After another 15 days, PVT Limited sells the finished products to an automotive manufacturer, but the sale is on credit, meaning that the automotive manufacturer does not pay cash immediately.
• About 30 days after the sale, the automotive manufacturer pays for the product, producing a cash inflow for PVT Limited.
• PVT Limited purchases supplies on terms of net 20 and offers terms of net 30 to its customers.

i) Compute the operating cycle. (1 mark)

ii) Compute the cash conversion cycle. (1 mark)

iii) Is PVT Limited doing a good job of managing its accounts payable? Why or why not? (1 mark)

iv) Is PVT Limited doing a good job of managing its accounts receivable? Why or why not? (1 mark)

v) Keeping the current operating cycle, under what condition, could PVT Limited have a negative cash conversion cycle? (1 mark)