Assume a firm receives the following credit terms from six suppliers and a 365-day year
Supplier 1: 2/10 net 50
Supplier 2: 1/10 net 30
Supplier 3: 2/10 net 150
Supplier 4: 3/10 net 60
Supplier 5: 1/10 net 45
Supplier 6: 1/20 net 80
a. Determine the interest rate associated with not taking the cash discount and paying at the end of the credit period for each of the six suppliers' credit terms.
b. In part (a), you calculated the interest rate associated with not taking the discount for each supplier's credit terms. Now you must decide whether or not to take the cash discount by paying within the discount period.
To pay early, you will need to borrow from your firm's line of credit at the local bank. The interest rate on the line of credit is the prime rate plus 2.5 percent.
You can get the most recent prime rate from the Federal Reserve at https://www.federalreserve.gov/releases/h15/update/.
For each supplier's terms, use the current prime rate to determine whether the firm should borrow from the bank or borrow from the supplier.