Question16 Precision Tools Ltd receives an invoice from a supplier with credit terms of 1/15, n/60. The firm has sufficient cash reserves but is also evaluating alternative uses of funds, including investing in short-term securities yielding 9.2% p.a. (a) What is the discount percentage offered for early payment? [1 mark] [input] Your response must be entered as a numerical value with 0 decimal places and excluding the percentage sign (%). (b) What is the annualised opportunity cost (%) to Precision Tools Ltd of not taking the discount? [2 marks] [input] Your response must be entered as a numerical value with 2 decimal places and excluding the percentage sign (%). (c) Should Precision Tools Ltd pay the invoice early or not? [1 mark] [input] Your response must be entered as 1 = should pay the invoice early or 0 = should not pay the invoice early. Maximum marks: 3.99 Flag question undefined

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Question16 Precision Tools Ltd receives an invoice from a supplier with credit terms of 1/15, n/60. The firm has sufficient cash reserves but is also evaluating alternative uses of funds, including investing in short-term securities yielding 9.2% p.a. (a) What is the discount percentage offered for early payment? [1 mark] [input] Your response must be entered as a numerical value with 0 decimal places and excluding the percentage sign (%). (b) What is the annualised opportunity cost (%) to Precision Tools Ltd of not taking the discount? [2 marks] [input] Your response must be entered as a numerical value with 2 decimal places and excluding the percentage sign (%). (c) Should Precision Tools Ltd pay the invoice early or not? [1 mark] [input] Your response must be entered as 1 = should pay the invoice early or 0 = should not pay the invoice early. Maximum marks: 3.99 Flag question undefined [input]Short answer

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BlackTom AI · Accepted Answer

Discount = 1% because the credit term "1/15" explicitly offers a 1% reduction if paid within 15 days.

1. Relevant knowledge points and concepts
- Trade-credit terms a/b, n/c: a is discount percent available if paid within b days; net is due in c days.
- The effective cost of not taking a cash discount is the periodic rate (discount / (1 − discount)) for the short deferral, annualised by (365 / number of days deferred).
- Compare the annualised cost of forgoing the discount to alternative investment yield to decide whether to pay early.

2. Step-by-step reasoning
(a) The discount percentage is the "1" in 1/15: 1%.

(b) Compute the annualised opportunity cost of not taking the discount:
- Discount d = 1% = 0.01.
- The cost per period = d / (1 − d) = 0.01 / 0.99.
  0.01 / 0.99 = 0.0101010101...
- Days of credit forgone = net due days − discount days = 60 − 15 = 45 days.
- Annualisation factor = 365 / 45 = 8.111111111...
- Annualised cost = (d / (1 − d)) × (365 / 45)
  = 0.0101010101 × 8.111111111
  = 0.0819191919... = 0.081919 ≈ 8.19% (rounded to two decimals).

(c) Decision rule: if the annualised cost of not taking the discount is greater than the return available on alternate use of funds, take the discount; otherwise do not.
- Alternate investment return = 9.20% p.a.
- Annualised cost of forgoing discount = 8.19% p.a.
- Since 8.19% < 9.20%, Precision Tools earns more by keeping funds invested at 9.2% than by using them to take the 1% discount. Therefore they should not pay early.

4. Why the correct answer is correct
- The computed 8.19% properly converts the short-term saving into an annual equivalent and shows that keeping cash invested yields a higher return.

5. Why other options are incorrect
- Using 365/45 × 1% without the (1 − d) denominator underestimates the true effective rate (would give ≈8.11% rather than 8.19%).
- Choosing to pay early (1) would be wrong because it sacrifices a higher 9.2% investment return for an 8.19% effective saving.