Suppose a firm makes purchases of $3.1 million per year under terms of 2/10, net 30, and takes discounts. Assume 365 days in a year for your calculations. Do not round intermediate calculations. a. What is the average amount of accounts payable net of di

Question:

Suppose a firm makes purchases of $3.1 million per year under terms of 2/10, net 30, and takes discounts. Assume 365 days in a year for your calculations. Do not round intermediate calculations.

a. What is the average amount of accounts payable net of discounts? (Assume that the $3.1 million of purchases is net of discounts – that is, gross purchases are $3,163,265, discounts are $63,265, and net purchases are $3.1 million.) Round your answer to the nearest dollar. $ _____.

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

I. There is no cost of trade credit at this point. The firm is using ‘free’ trade credit.

II. The cost of the trade credit is $254,795.

c. If the firm did not take discounts but it did pay on the due date, what would be its average payables? Round your answer to the nearest dollar. $ _____.

If the firm did not take discounts but it did pay on the due date, what would be its nominal cost? Round your answer to two decimal places. _____ %

If the firm did not take discounts but it did pay on the due date, what would be its effective cost? Round your answer to two decimal places. _____ %

d. What would the firm’s cost of not taking discounts be if it could stretch its payments to 45 days? Round your answers to two decimal places.

Nominal cost _____ %

Effective cost _ %