Question

Hello sir, I have done this question in two ways. Please guide me which one is correct. Product Q The annual demand for Product Q is 456,000 units per year and Plot Co buys in this product at $1 per unit on 60 days credit. The supplier has offered an early settlement discount of 1% for settlement of invoices within 30 days Plot finances working capital with short term finance for 5% per year. Assume 365 days. (b) Calculate the net value in dollars to Piot Co of accepting the early settlement discount for Product Q. Solution 1: Assuming the rate as deposit rate (5%). We will invest the amount till the payment date (30 days more than discount repayment day). If Accept Discount Outflow= 456000*0.99=451440 Interest Income = 0 Total Costs = 451440 If reject discount Outflow = 456000 Interest income= 456000*5%*30/365= 1855 Total Costs = 454126 Net Saving if accepted Discount= 2686 Solution 2: Assuming the rate as borrowing rate (5%). We borrow more finance to entertain the days we paid early (30 days earlier the credit term limit). If Accept Discount Outflow= 456000*0.99=451440 Interest Expense = 1855 Total Costs = 453295 If reject discount Outflow = 456000 Interest expense=0 Total Costs = 456000 Net Saving if accepted Discount= 2705 Please help.