Kaplan Section B Jeep Co – Working Capital Mngt

Hello Sir,
May you please explain this answer, as I am not understanding this answer, please.

Jeeps Co is concerned about its cash position and has taken to delaying payments to some
suppliers in order to ease that problem. Each month the purchase ledger department splits
the total value of invoices for that month into three categories, A, B and C depending on
their importance.
Category A invoices, amounting to $2,000,000, are urgent and paid after 30 days
Category B invoices, amounting to $3,000,000, are less urgent and paid after 60 days; and
Category C invoices, amounting to $4,000,000, are least urgent and paid after 90 days.
Several suppliers have reacted to this by offering Jeeps Co a 2% cash discount if the
accounts are settled within 15 days. Jeeps Co is currently considering whether or not to
accept this. Another supplier, who Jeeps Co now waits 90 days to pay, has been
threatening legal action over the $300,000 currently owed. Jeeps Co feels that some sort of
compromise might be needed.
Jeeps Co’s cost of capital is 12% per annum.
Assume that there are 30 days in a month and that purchases accrue evenly over the year.

(d) To avoid a court action, Jeeps Co is thinking of offering to repay the creditor it owes
$300,000 in instalments as follows (all figures in $000)
Now 1 month 2 months 3 months 4 months 5 months
75 45 45 45 45 45
How much will Jeeps Co save, in present value terms, if the creditor accepts the
instalment offer instead of Jeeps having to pay in full immediately (to the nearest
$00)?

Answer is below,

(d) $6,300
Monthly rate = (1.12(1/12) – 1) × 100 = 0.95%
PV of instalments
= 75 +(1.00955/45)^1+(1.00955/45)^2+(1.00955/45)^3+(1.00955/45)^4+(1.00955/45)^5 = $293,727
Paying by instalments will save Jeeps Co $6,273 compared to paying $300,000
immediately (or $6,300 to the nearest $00).