You are the head of purchasing for John Deere tractor division. You usually purchase 15,000 sets per quarter or 60,000 sets per year at a cost of $5,000 per set for fenders per tractor which the company pays at the beginning of each quarter. Because of the China tariffs where your supplier purchases its steel from has come to you with a proposal. The proposal is a simple one but has several factors you need to think about before you agree to go ahead and agree to it.

If you agree to purchase and pay for up front one years' worth of fenders (60,000 sets) they will inventory the fenders and will give you a 2.25% discount on the total cost of the fenders above beyond what you usually pay for the fenders.

1. The first thing to figure out is how much capital (money) you would be tying up for the company for a year by writing a check for all the fenders.
2. The second item is to calculate how much capital (money) is the 2.25% discount worth?
3. The third item you need to think about is you know the company puts excess cash into treasury bills and currently earning at the rate of 3.25%. (Before you calculate the number here in 3 remember you pay for the fenders up front at the beginning of each quarter.)
4. Is it worth getting a 2.25% discount and paying for all the fenders for a year up front or is the John Deere better off to continue to buy them quarterly and earn the interest on the treasury bills?