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Swap Co is due to receive goods costing $2,500. The terms of trade state that payment must be received within
three months. However, a discount of 1·5% will be given for payment within one month.
Which of the following is the annual percentage cost of ignoring the discount and paying in three months?
A=6·23%
B=9·34%
C=6·14%
D=9·49%
The correct response is as follows:
D
If the discount is accepted, the company must pay $2,462·50 at the end of one month.
Alternatively, the company can effectively borrow the $2,462·50 for an additional two months at a cost of
$37·50.I can’t understand this question! If the company is not taking the discount, why will it borrow the 2462.50
Why have you titled this thread “swap”? It has nothing to do with swaps – it is the management of working capital!!
The answer does not say that they borrow money! It says that delaying payment is effectively the same as borrowing money – delaying payment means that they have more cash now, but have to pay more to the supplier later.
Please watch my free lectures on working capital, because I explain this in the lectures.
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