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You work in the procurement department, a key part of the Purchase to Pay portion of the value chain, for Mumford's Supermarket, is a regional chain of stores in the Midwest. Your main supplier is the McLane Company Inc., a national distributor based in Texas with distribution assets that surround your stores. McLane has offered Mumford's a 2% discount for orders paid within 10 days, in return for Mumford's committing to increasing average order sizes (and therefore total purchase) by 10%. You are charged with evaluating this proposal and recommending whether to accept it or not. Mumford's normally orders $1,000,000 every 45 days from McLane, and would shift purchases equal to the 10% from another supplier who it pays in 75 days, in order to earn the 2% discount. Normally, on the base $1,000,000 of purchases, Mumford's has been paying McLane in 45 days with no discount. The Mumford's annual opportunity cost of capital is 10%. Would Mumford's be wise to take the discount in return for paying earlier and committing to increase its purchases by 10% from McLane? How would you determine the economics of this tradeoff? Assume the contract has no expiration date (a perpetuity). 1. Compare the returns with this tradeoff (APR and EAR) vs. its opportunity cost of capital. 2. Determine the NPV of the decision under the new policy for Mumford's, assuming the contract is in place forever. 3. Identify the working capital movements and WC implications of this change for Mumford's. 4. What are some strategic and risk considerations for Mumford's in making this change? 5. Optional: As a challenge, see if you can determine the NPV and WC implications if the proposal was a supply contract for 5 years (60 30-day intervals 60 purchases). You work in the procurement department, a key part of the Purchase to Pay portion of the value chain, for Mumford's Supermarket, is a regional chain of stores in the Midwest. Your main supplier is the McLane Company Inc., a national distributor based in Texas with distribution assets that surround your stores. McLane has offered Mumford's a 2% discount for orders paid within 10 days, in return for Mumford's committing to increasing average order sizes (and therefore total purchase) by 10%. You are charged with evaluating this proposal and recommending whether to accept it or not. Mumford's normally orders $1,000,000 every 45 days from McLane, and would shift purchases equal to the 10% from another supplier who it pays in 75 days, in order to earn the 2% discount. Normally, on the base $1,000,000 of purchases, Mumford's has been paying McLane in 45 days with no discount. The Mumford's annual opportunity cost of capital is 10%. Would Mumford's be wise to take the discount in return for paying earlier and committing to increase its purchases by 10% from McLane? How would you determine the economics of this tradeoff? Assume the contract has no expiration date (a perpetuity). 1. Compare the returns with this tradeoff (APR and EAR) vs. its opportunity cost of capital. 2. Determine the NPV of the decision under the new policy for Mumford's, assuming the contract is in place forever. 3. Identify the working capital movements and WC implications of this change for Mumford's. 4. What are some strategic and risk considerations for Mumford's in making this change? 5. Optional: As a challenge, see if you can determine the NPV and WC implications if the proposal was a supply contract for 5 years (60 30-day intervals 60 purchases)