A firm is offered credit terms of 2/10 net 45 by most of its suppliers but frequently does not have the cash available to take the discount. The firm has a credit line available at a local bank at an interest rate of 12 percent. The firm should
A) take the cash discount and pay on the first day of the cash discount period.
B) take the cash discount, financing the purchase with the line of credit, the cheaper source of funds.
C) give up the cash discount, financing the purchase with the line of credit.
D) take the cash discount and pay on the 45th day after the date of sale.

Question

Quizplus · Accepted Answer

The cost of not taking the discount is higher than the cost of borrowing from the bank. The firm should use the line of credit to take advantage of the discount.

A Firm Is Offered Credit Terms of 2/10 Net 45