Lawton Pipelines, Inc. operates oil pipelines throughout the southern United States. The firm currently buys on terms of 1/10, net 30, but generally does not pay until 40 days after the invoice date. Lawton Pipelines’ purchases total $1,095,000 per year. Assume a 360-day year.

a. Assume that Lawton Pipelines continues to pay its suppliers on the 40th day after the invoice date. What is the annual opportunity cost of trade credit in this situation?

b. Assume that the new management of Lawton Pipelines decides that “stretching” Accounts Payable by paying on the 40th day after the invoice date is unethical. Management establishes a policy that suppliers’ invoices must be paid on the net date due. What is the annual opportunity cost of trade credit, assuming that Lawton Pipelines now pays its suppliers on the 30th day after the invoice date, as required by the invoice terms?

c. Lawton Pipelines has an 8% cost of capital. Given this information, should Lawton Pipelines take the 1% discount offered and pay on day 10; or, should Lawton instead pay on day 30 at the end of the credit period? Please explain.

Answer rating: 100% (QA)

a The annual opportunity cost of trade credit in this situation would be 109500 b The annual op... View the full answer