You have an accounts payable to a German exporter for 100 Po

You have an accounts payable to a German exporter for 100 Porsche Cayenne SUVs. The seller offers a 2 percent discount for payment within 10 days and full payment due in 30 days (2/10 net 30). Today the exchange rate is $1.40 per Euro. You notice that the 30 day forward rate for the $/Euro is $1.38…..what should you do? You owe 70,000 Euros for each of the cars (before any discounts). [show your work!]

Solution

Account payable for 100 Porche SUVs at the rate 70,000 for each car is (70,000*100) 7,000,000 Euros

In terms of todays exchange rate account payable is (7,000,000*1.40) $9,800,000

In terms of 30 days forward rate the amount payable is (7,000,000*1.38) $9,660,000

2 percent discount for early payment is (..02*9,800,000) $196,000

Therefore to avail discount account payable is (9800000-196000) or (.98*9800000) $9,604,000

On comparison of account payable with discount and full payment in 30 days, it is better to avail the offer of discount which saves (9,660,000-9,604,000) $56,000