Whether firm should take discount from each supplier

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Reference no: EM131316813

Derson Manufacturing wishes to evaluate the credit terms offered by its four biggest suppliers of raw materials. The prime rate is currently 7.0 percent, and Derson can borrow short-term funds at a spread of 2.5 percent above the prime rate. Assume a 365-day year and that the firm always pays its suppliers on the last day allowed by their stated credit terms.

The terms offered by each supplier are as follows: Supplier 1: 2/10 net 40 Supplier 2: 1/15 net 60 Supplier 3: 3/10 net 70 Supplier 4: 1/10 net 50

a. Calculate the interest rate associated with not taking the discount from each supplier.

b. Assuming the firm needs short-term financing and considering each supplier separately, indicate whether the firm should take the discount from each supplier.

c. If the firm did not need any short-term financing, when should it pay each of the suppliers?

d. If the firm could not obtain a loan from banks and other financial institutions and needed short-term financing, when should it pay each of the suppliers?

e. What impact, if any, would the fact that Derson could stretch its accounts payable (net period only) from Supplier 1 to day 90 without damaging its credit rating have on your recommendation with regard to Supplier 1 in part (b)? Explain you answer.

Reference no: EM131316813

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