Should they borrow the money to pay its accounts payable

Reference no: EM13260400

The company has a cash flow pronblem. They owe their suppliers $100,000 on credit terms of 2/10 net 40, nut don't have the cash to pay during the discount period. They can however, borrow the $100,000 at an annual rate of 20%. Should they borrow the money to pay its accounts payable?

a. No, the 18% annual rate is much greater than the 2% discount.
b. No, additional borrowing will cost more for interest than the discount is worth.
c. Yes, the effective cost of foregoing the discount is greater than 20%.
d. It doesn't matter, because the cost of borrowing is $2,000 and the discount is $2,000, so the company ends up in the same position either way.

Reference no: EM13260400

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