Crosswell International is a U.S.-based manufacturer and distributor of health care products, including children's diapers.

Crosswell has been approached by Leonardo Sousa, the president of Material Hospitalar, a distributor of health care products throughout Brazil and he is interested in distributing Crosswell's major diaper product, Precious Diapers in brazil, but only if an acceptable arrangement regarding pricing and payment terms can be reached.

The proposed sale by Crosswell to Material Hospitalar, at least in the initial shipment, is for 10 containers of 968 cases of diapers at $39.18 per case, CIF Brazil, payable in U.S. dollars. This is a total invoice amount of $379,262.40.

Payment terms are that a confirmed L/C will be required of Material Hospitalar on a U.S. bank. The payment will be based on a time draft of 60 days, presentation to the bank for acceptance with other documents on the date of shipment. Both the exporter and the exporter's bank will expect payment from the importer or importer's bank 60 days from this date of shipment.

What Should Crosswell Expect? Assuming Material Hospitalar acquires the L/C and it is confirmed by Crosswell's bank in the United States, Crosswell will ship the goods after the initial agreement, say 15 days.

Crosswell's Proposal [contd]

Simultaneous with the shipment, when Crosswell has lost physical control over the goods, Crosswell will present the bill of lading (acquired at the time of shipment) with the other needed documents to its bank requesting payment. Because the export is under a confirmed L/C, assuming all documents are in order, Crosswell's bank will give Crosswell two choices:

1.Wait the full time period of the time draft of 60 days and receive the entire payment in full ($379,262.40).

2.Receive the discounted value of this amount today. The discounted amount, assuming U.S. dollar interest rate of 6.00% per annum (1.00% per 60 days):

Because the invoice is denominated in U.S. dollars, Crosswell need not worry about currency value changes (currency risk). And because its bank has confirmed the L/C, it is protected against changes or deteriorations in Material Hospitalar's ability to pay on the future date

What Should Material Hospitalar Expect?

Material Hospitalar will receive the goods on or before day 60. It will then move the goods through its distribution system to retailers.

Depending on the payment terms between Material Hospitalar and its buyers (retailers), it could either receive cash or terms for payment for the goods. Because Material Hospitalar purchased the goods via the 60-day time draft and an L/C from its Brazilian bank, total payment of $379,262.40 is due on day 90 (shipment and presentation of documents was on day time draft) to the Brazilian bank.

Material Hospitalar, because it is a Brazilian-based company and has agreed to make payment in U.S. dollars (foreign currency), carries the currency risk of the transaction.

6.What are the benefits of accepting the total payment after the full term? What are the benefits of accepting the early, discounted payment?

7.In your opinion, which choice of payment would you advise Crosswell to choose? Explain.