The expression "5/10, net 45" means that the customers receive a 5% discount if they pay within 10 days; otherwise, they must pay in full within 45 days. what would the seller’s cost of capital have to be in order for the discount to be cost justified?

Ans. The seller´s cost of capital has to be 70.73% annual in order to justify this 5% discount if bills are paid within 10 days.

Explanation:

Hi, in order for discount to be justified, the seller´s cost of capital must be equal or higher than the cost of this discount, and to find this amount, we must use the following formula.

Where the discount is presented in its decimal form. So it should look like this.

That is 70.73% annual.

Best of luck.

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