Case 2: num.4

4. The lag between the purchase date and the date on which payment is due is known as the terms lag. The lag between the due date and the date on which the buyer actually pays is the due lag, and the lag between the purchase and actual payment dates is the pay lag. Thus,

Pay lag = terms lag + due lag

State how you would expect the following events to affect each type of lag:

b. The company imposes a service charge on late payers.

c. A recession causes customers to be short of cash.

d. The company changes its terms from net 10 to net 20.

5. The Branding Iron Company sells its irons for $50 apiece wholesale. Production cost is $40 per iron. There is a 25% chance that wholesaler Q will go bankrupt within the next year. Q orders 1,000 irons and asks for six months credit.

Should you accept the order?

Assume that the discount rate is 10% per year, there is no chance of a repeat order, and Q will pay either in full or not at all.