QUESTION 5 - WORKING CAPITAL MANAGEMENT

All Local Restaurant Limited has three (3) possible suppliers, all of which offer different credit terms. Apart from the slight differences in credit terms, their products and services are virtually identical. The credit terms offered by these suppliers are shown in table shown on the next page.

Supplier Credit Terms

Supplier 1 3/10 net 30

Supplier 2 1/20 net 45

Supplier 3 5/5 net 35

Assuming a 365-day year, answer the following.

a. Identify and briefly describe TWO major sources of spontaneous short-term financing available to Total Local Restaurant (6 marks)

b. Calculate the approximate cost of giving up the cash discount from each supplier (6 marks)

c. If the firm can obtain short-term funds from its commercial bank at an annual interest rate of 20%, which if any, of the suppliers' cash discounts should the restaurant give up? Evaluate each supplier separately, and provide a brief explanation to support your answer (5 marks)

d. What impact, if any, will "stretching" the accounts payable (net period only) of supplier 3 by 15 days, have on your answer to part b with regards to supplier 3. (3 marks)