Question
Bradford Construction Supply Company is suffering from a prolonged decline in new construction in its sales area. In an attempt to improve its cash position,
Bradford Construction Supply Company is suffering from a prolonged decline in new construction in its sales area. In an attempt to improve its cash position, the firm is considering changes in its accounts-payable policy. After careful study, it has determined that the only alternative available is to slow disbursements. Purchases for the coming year are expected to be $37.5 million. Sales will be $70 million, which represents about a 20 percent drop from the current year. Currently, Bradford discounts approximately30 percent of its payments at 4 percent, 10 days, 45 net , and the balance of accounts is paid in 45 days. If Bradford adopts a policy of payment in 60 days or 90 days, how much can the firm gain if the annual opportunity cost of investment is 10 percent? What will be the result if this action causes Bradford Construction suppliers to increase their prices to the company by 0.8 percent to compensate for the 90-day extended term of payment? In your calculations, use a 365-day year and ignore any compounding effects related to the expected returns.
What is the amount of the discount the firm can earn under the current policy?
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