Determine the firms annual lost cash discounts

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Reference no: EM131336636

The Eaton Company needs to raise $250,000 to expand its working capital and has been unsuccessful in attempting to obtain an unsecured line of credit with its bank. The firm is considering stretching its accounts payable.

Eaton's suppliers extend credit on terms of "2/10, net 30." Payments beyond the credit period are subject to a 11⁄2 percent per month penalty. Eaton purchases $100,000 per month from its suppliers and currently takes cash discounts.

For this problem, assume that a year consists of twelve 30-day months. Assuming that Eaton is able to raise the $250,000 it needs by stretching its accounts payable, determine the following:

a. The firm's annual lost cash discounts

b. Annual penalties

c. The annual financing cost of this source of financing.

Reference no: EM131336636

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