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Nacho Co is a multinational company which has been reviewing its working capital management.
Nacho Co has received an offer of a discount for bulk purchase from Taco Co, one of its major suppliers. Taco Co has offered a 0.75% discount on orders of 30,000 units or more of Component X. The current purchase price of component X is $20. Nacho Co currently consumes 120,000 units of Component X each year and places orders of 10,000 units at the end of each month. Holding cost for Component X is $1.20 per unit per year and ordering costs are $125 per order.
Salsa Co, a major supplier of Component M to Nacho Co, has offered a 1% early settlement discount for payment within 20 days. Nacho Co currently takes 60 days to settle outstanding invoices with Salsa Co and this equates to $3.3m as a trade payable.
Nacho Co has a cost of short-term finance of 5% through an overdraft and no surplus cash. Assume that there are 360 days in each year.
Nacho Co currently has decentralised treasury operations, but is considering implementing a centralised treasury department.
What is the financial consequence of accepting the bulk purchase discount?
Benefit of $7,000 per year
Benefit of $5,000 per year
Cost of $7,000 per year
Cost of $5,000 per year
What is the financial consequence of accepting the early settlement discount?
Benefit of $143,000 per year
Cost of $77,000 per year
Cost of $88,000 per year
Benefit of $88,000 per year
Which of the following statements is/are correct ?
(1) Factoring with recourse means that you don’t have bad debt insurance with the factor
(2) Invoice discounting can increase the efficiency of trade receivables management for a company
(3) Companies expecting to receive foreign currency from foreign accounts receivable will be concerned about the risk of the foreign currency depreciating against the domestic currency
1 only
1 and 3 only
2 and 3 only
1, 2 and 3
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