principles of managerial finance 14th edition

chapter 16 problem 6

full explaination for all parts

Cash discount decisions Prairie Manufacturing has four possible suppliers, all of which offer

different credit terms. Except for the differences in credit terms, their products and services are

virtually identical. The credit terms offered by these suppliers are shown in the following table.

(Note: Assume a 365day

year.)

Supplier Credit terms

J 1/5 net 30 EOM

K 2/20 net 80 EOM

L 1/15 net 60 EOM

M 3/10 net 90 EOM

a. Calculate the approximate cost of giving up the cash discount from each supplier.

b. If the firm needs shortterm

funds, which are currently available from its commercial bank at

9%, and if each of the suppliers is viewed separately, which, if any, of the suppliers cash

discounts should the firm give up? Explain why.

c. Now assume that the firm could stretch by 30 days its accounts payable (net period only)

from supplier M. What impact, if any, would that have on your answer in part b relative to this

supplier?

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