Let's break down and solve the question step by step: --- **Step 1: Understand the Credit Terms and Calculate the Cost of Not Taking the Discount** The credit terms “2/15, net 60” mean: - You get a **2% discount if you pay within 15 days**. - Otherwise, the **full invoice amount is due in 60 days**. The **cost of not taking the discount** is essentially the cost of borrowing the invoice amount for 45 days (from day 15 to day 60) at a 2% interest rate. The formula for the annualized cost (Effective Annual Rate, EAR) is: \[ \text{Cost per period} = \frac{\text{Discount \%}}{1 - \text{Discount \%}} \] \[ \text{Number of periods per year} = \frac{365}{\text{Payment period} - \text{Discount period}} \] \[ \text{EAR} = \left(1 + \frac{0.02}{0.98}\right)^{\frac{365}{45}} - 1 \] **Explanation:** Not taking the 2% discount is like borrowing the money for 45 days at a 2% interest rate, so we calculate the annualized rate of this “loan”. --- **Step 2: Plug in Numbers and Calculate Effective Annual Rate** \[ \text{Cost per period} = \frac{2}{98} \approx 0.02041 \] \[ \text{Number of periods per year} = \frac{365}{45} \approx 8.11 \] \[ \text{EAR} = (1 + 0.02041)^{8.11} - 1 \] First, calculate \( (1 + 0.02041)^{8.11} \): - \( \ln(1.02041) \approx 0.0202 \) - \( 0.0202 \times 8.11 \approx 0.1638 \) - \( e^{0.1638} \approx 1.1778 \) So, \[ \text{EAR} = 1.1778 - 1 = 0.1778 \text{ or } 17.78\% \] **Explanation:** The effective annual rate from not taking the discount is about **17.8%**. --- **Step 3: Compare EAR to WACC and Decide When to Pay** - If your **WACC** is **20%** (higher than 17.8%): - The cost of not taking the discount (17.8%) is **less than** your cost of capital (20%). - **So, you should NOT take the discount; pay on day 60** (use the supplier’s credit, which is “cheaper” than your own capital). - If your WACC is **15%** (lower than 17.8%): - The cost of not taking the discount (17.8%) is **higher than** your cost of capital (15%). - **So, you should take the discount and pay on day 15** (because it’s “cheaper” to pay early than to borrow at the implied supplier rate). **Explanation:** - **Pay at the latest date (day 60)** only if the supplier's "loan" (17.8%) is cheaper than your own cost of money (WACC). - **Pay early (day 15) and take the discount** if your own financing (WACC) is cheaper. --- ### **Final Answer** - The **effective annual rate** implied by the credit terms is **17.8%**. - If your **WACC is 20%**, you should **pay on day 60** (do not take the discount). - If your **WACC is 15%**, you should **pay on day 15** and **take the discount**. - **Your decision changes if your WACC changes:** pay early if WACC < 17.8%, pay late if WACC > 17.8%.