Question
Delta Co is concerned about its cash position and has taken to delaying payments to some suppliers in order to ease that problem. Each months
Delta Co is concerned about its cash position and has taken to delaying payments to some suppliers in order to ease that problem. Each months the purchase ledger department splits the total value of invoices for that month into three categories: A1, B2 and C3 depending on their importance. Category A invoices, amounting to 2,000,000 , are urgent and paid after 30 days; Category B invoices, amounting to 3,000,000 , are urgent and paid after 60 days; and Category C invoices, amounting to 4,000,000 , are urgent and paid after 90 days. Several suppliers have reacted to this by offering Delta Co a 2% cash discount if the accounts are settled within 15 days. Delta Co is currently considering whether or not to accept this. Another supplier, who Delta Co now waits 90 days to pay, has been threatening legal action over the 300,000 currently owed. Delta Co feels that some sort of compromise might be needed. Delta Co cost of capital is 12% per annum.
Assume that there are 30 days in a month and that purchases accrue evenly over the year. Delta Co is considering the advantage of the early settlement discount from those it currently pays after:
(1) 60 days;
(2) 90 days.
From which payables should Delta Co take the 2% cash discount? Select one:
a. (1) only
b. Both (1) and (2)
c. (2) only
d. Neither (1) nor (2)
What is Delta Co payables period (to the nearest day)? Select one:
a. 60 days
b. 67 days
c. 70 days
d. 77 days
e. 83 days
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