Chapter 5: Real Account Valuation Methods Trade Credit Problems Page 96, problem \#3 You are a practice administrator and are running into a cash-fiow problem for the curfent month. One of your supply vendor's invoices is coming closer to a payment due date and has the following trade credit terms: 2,10, net 30 The total amount due on the invoice is $1,400.85. Based on your or ganization's monthly budget and estimated cash flows, you are looking at paying this invoice on either day 12,15 , or 25. a) Calculate the effective interest rate for each of these possible payment days. annualized effective interest rate for day 12 : X=365/2 days after the discount period x=182.5(296of$1,400.50)x=182.5(28.01)x=$5,111.83 annualized effective interest rote for day 15 : X=365/5daysafterthediscountperiodX=73/28of51,400.50) x=73(2%of$1,400.50)x=73(28.01)x=$2,044.73 annualized effective interest rate for day 25: x=365/15 days after the discount period x=24.3(26of$1,400.50) x=24.3(28.01)x=5680.64 b) Assuming the cash flow is positive enoughi to cover the cost of this invoice on any of these projected three dates, decide which date to pay the invoice and discuss why that date waschosen. Choose to pay on day 25 becsuse o) the discount period has already been missed, and b) day 25 has the Trade Credit Problems Page 96, problem \#4 You are a hospital administrator and would like to renegotiate your current trade credit terms agreement (3/12, net 30) with your medical supply vendor for invoices that usually average $500/ month. Your board members are requesting an updated trade credit agreement of 5/10, net 45 instead. Discuss possible reasons why your organization may be able to utilize leverage in this situation to hopefully receive a more optimal trade credit agreement. Next, using the estimated monthly supply invoice balance provided - compare both current and requested trade credit agreements with regards to their effective interest rates for: a) poying within the discount period 3/12,net3034of$500=$15 5/10,net455%of$500=$25 If able to pay during the discount period, the organization will expenence a greater trade credit discount under the 5/10, net 45 trade credit terms. b) paying on day 20 While the payment date (20th) is used for both trade credit analyses, it is clear that the lower effective annualized interest rate is experienced wath the 3/12, net 30 trade credit agreement (versus 5/10, net 45 ), even though the latter has a higher trade credit early payment percentage discount. If able to pay within the precsribed discount periods, the 5/10, net 45 trade credit arrangement is best. However, if not able to pay withing a prescribed discount period, the 3/12, net 30 trade credit arrangement is cptimal