Sales Discounts and a Line of Credit – BEC Becker

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    Matt
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    I'm currently studying for BEC using Becker and came across a question that asked what the most attractive option for the firm was given the following circumstances:

    co. a – terms 1.5/15, net 30
    co. b – terms 1/10, net 30
    co. c – terms 2/10, net 60
    the firm would have to borrow from a bank at an annual rate of 10% to take any cash discounts.

    I understand the formula to get to the ‘cost' of not taking the trade credit discount (360/(total pay period – discount period))*(Discount/(1-Discount)), which would give you the cost for each of:

    co a. – 36.55%
    co b. – 18.18%
    co c. – 14.69%

    But I don't understand why the answer is to go with co. a, pay in 10 days, and borrow from the bank and NOT go with co. c, pay in 10 days, and borrow from the bank. I get that co. a has the highest ‘opportunity cost' when compared to the others, but isn't that just when you look at it in isolation compared to the others? If you are borrowing from the bank solely to take advantage of these cash discounts, and pay the same rate at the bank regardless of what supplier you go with, why wouldn't you just take the largest cash discount?

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