A company has a $150,000 invoice that is due in 60 days with a 2% discount if paid in 10. The company can invest the 2% or $3000 and earn 6% per year. What should the company do?
To determine what the company should do, we need to compare the benefit of taking the discount and investing the money versus paying the invoice in full.
First, let's calculate the savings from taking the 2% discount. The discount amount is calculated by multiplying the invoice amount ($150,000) by the discount rate (2% or 0.02):
Discount = $150,000 x 0.02 = $3,000
By taking the discount, the company would save $3,000.
Next, let's calculate the potential earnings by investing the $3,000 saved by taking the discount. The interest earned can be calculated using the annual interest rate of 6%:
Earnings = $3,000 x 0.06 = $180
By investing the $3,000 at a 6% annual interest rate, the company would earn $180 over a year.
Now, let's consider the time value of money. The invoice is due in 60 days, but if the company pays early to receive the discount, the payment is made at day 10. Therefore, the company would have an additional 50 days to invest the $3,000 until the invoice due date.
To calculate the earnings on an investment for 50 days, we need to adjust the interest rate accordingly. The effective interest rate for 50 days can be found using the formula:
Effective Interest Rate = (1 + Annual Interest Rate)^(Number of Days / 365) - 1
Effective Interest Rate = (1 + 0.06)^(50 / 365) - 1 = 0.008163
Therefore, the company would earn an additional $3,000 x 0.008163 = $24.49 by investing the saved amount for 50 days.
To summarize the options:
Option 1: Take the discount and invest the savings.
Savings from discount = $3,000
Additional earnings from investing the saved amount for 50 days = $24.49
Total benefit = $3,000 + $24.49 = $3,024.49
Option 2: Pay the invoice in full.
No savings or additional earnings.
Based on the calculations, it is more beneficial for the company to take the 2% discount and invest the savings, as the total benefit is $3,024.49, which is greater than the $3,000 due for the invoice.