Question # 03 Subject: financial management

Suppose a firm makes purchases of Rs 10.95 million per year under terms of 2/10, net 30, and takes discounts. i. What is the average amount of accounts payable net of discounts? (Assume the Rs 10.95 million of purchases is net of discountsthat is, gross purchases are Rs 11,173,469.40, discounts are Rs 223,469.40, and net purchases are Rs 10.95 million.)

ii. Is there a cost of the trade credit the firm uses?

iii. If the firm did not take discounts but did pay on the due date, what would be its average payables and the cost of this nonfree trade credit?

iv. What would be the firm's cost of not taking discounts if it could stretch its payments to 40 days?