B Ltd. has received an offer to get a discount of 2% on an invoice value of 75,000, if payment is made within one month instead of normal credit…

Discount on early payment = 2% x 75,000 = 1,500 Net Benefit (A) = 1,500 - Tax (30%) = 1,050 The company must borrow the discounted invoice amount via a bank overdraft for the 2-month period. Amount to be Borrowed = 75,000 – 1,500 = 73,500 Bank overdraft interest for 2 months: = P x R x T = 73,500 × 10% × 2/12 = 1,225 After tax interest cost = 1,225 × (1-0.30) = 1,225 × 0.70 = 857.50 Net Saving = Net Benefit - Net Interest Cost = 1,050 - 857.50 = 192.50 (Net Saving) Since the company gains a net benefit of 192.50 by making early payment, B Ltd. should accept the discount offer. Alternatively, the question can be solved as below: Annualized benefit of discount = Discount % 100-Discount % X 12 months Credit Period - Discount Period = 2/98 x 12/2 x 100 =12.245 % Post tax benefit = 12.245 x (1-0.3) =8.571 Post tax Bank OD rate = 10% x (1-0.3) =7% Benefit of discount is more than cost of OD. Hence, discount should be accepted.