Can someone please explain why (a) is not correct? Q. Which of the following strategies is most likely to be considered good payble management? a. taking trade discounts only if the firm’s annual return on short term investments is less than the discount percentage. b.paying invoices on the last posible day to still get the supplier’s discount for early payment c.paying trade invoice on the day they arrive correct answer is b.
May i ask, how would short term interest rates matter at all? Pay as late as possible seems the most correct to me.
As per book, If a company is paying payables prior to its due date, cash is used unnecessarily and interest on it is scrificed. lets say if form has due 90 day from now and term on payment has discount “2/10 net 60”. so paying on 60th day, it will loose the interest on cash in hand for next month.
my bad, let me rephrase the e.g. “2/10 net 30” then if firm pays on 10th won’t it be loosing interest for next 20 days. so taking trade discounts only if the firm’s annual return on short term investments is less than the discount percentage, wont be best strategy.
Let’s say you have $100 in cash and your bill for iphone is $100 a month. If you pay your bill within next 31 days, you get 10% discount. if you invest in a short-term investment, your monthly return on the investment is 15%. So… Best payable management, I think, is to invest $100 in a short-term investment and receive $15 at maturity (let’s say 30 days) and pay your bill for $90. Then, you will make $25 dollar {(100*.15)+100}-(100*.9) by just delaying your bill. a. taking trade discounts only if the firm’s annual return on short term investments is less than the discount percentage. - whether it’s annual return on short term investments is less, equal, higher, you always should take discounts. b.paying invoices on the last posible day to still get the supplier’s discount for early payment - as I explained, you should delay your bills on the last possible day to still get the discount. c.paying trade invoice on the day they arrive - who does this? stupid. Hope it makes sense.
isnt there some stupid formula you can derive to determine when to effectively pay down payables given trade discount, interest cost, etc.
thanks dhyun3. got this. I wish there might be any forumla for this, so far i havn’t seen any.