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
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Swap
9y ago#1Why 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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