1.(The Effective Cost of Trade Credit)

Your firm purchases goods from its supplier on terms of 2/10, Net 45.What is the effective annual cost to your firm if it chooses not to take advantage of the trade discount offered?

2.(Cash Discount) The firm offers a Net 30 customer cash discount of 2/10. Suppose the customer order is for $1000, and the firm can invest the funds received from the customer on a short-term investment, what is the minimum effective annual rate the investment has to offer for the cash discount to be worthwhile to the firm?

3.(NPV of Switching to a credit policy) Your company is evaluating a switch from a cash only policy to a net 30 policy.The price per unit product is $49, and the variable cost per unit is $20.The company currently sells 100 units per month.Under the proposed policy, the company expects to sell 110 units per month.The company's cost of capital for this line of business is 2% monthly.Assume that the possibility of nonpayment is small enough to ignore.What is the NPV of switching to a net 30 policy?Should the company switch?

4.(NPV of Switching to a credit policy) Consider the same situation from the previous question, if the projected increase of sales from 100 units to 110 units is only an estimate, what increase in unit sales is necessary for the company to break even when switching to a net 30 policy?

5.(Benefit of granting credit) Your company is considering granting credit to a new customer for a one time sale. The variable cost per unit is $20; the current price per unit is $49; and the monthly required return (cost of capital) is 2%.What probability of default for the new customer would make the firm break even when granting credit for the one time sale?

6.(EOQ model) Suppose your company has carrying costs for a particular inventory item of $0.75 per unit per year.Annual sales of this item are 46,800 units.The fixed order costs are $50 per order.Using the EOQ model, what is the optimal order quantity each time?