11.2.1 Erratum_Lecture_22

# 11.2.1 Erratum_Lecture_22 - Problem 1 Gopher Ltd Erratum to...

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Unformatted text preview: Problem 1 Gopher Ltd Erratum to Lecture 22: The discount should have been 1% as for the rest of the questions (a) What if the terms were 1/10, net 30, but Gopher believes it can get away with not paying till the end of day 45? 1 Solution 1 (c) In this case the opportunity cost of foregoing the discount is tiny! • So take the 10 days of free credit and the ensuing 35 days of cheap credit And ignore the discount enticement 0.01 360 ICGOPHER = 1 − 0.01 45 − 10 = 10.39% Superior to early payment financed by overdraft by 10.39 − 21 = −50.53% 21 2 i.e., 50.53% cheaper Solution 1 (c) revisited for 2% discount Problem 1(c) should have been “1/10, net 30” and not “2/10, net 30”. • But , running with 2/10, net 30 but paid without bad consequences on day 45: 0.02 360 ICGOPHER = 1 − 0.01 45 − 10 = 20.99% One would be indifferent , edging slightly in favour of ignoring the 21% discount 3 ...
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