A finished FIN-450 Topic 6 trade credit and terms analysis example, converting discount terms into an annual rate, pricing longer customer terms as a loan and accepting only one proposal. Searches like "fin 450 topic 6 assignment example", "fin450 topic 6 sample" and "fin-450 topic 6 example" land here.
What a finished FIN-450 Topic 6 trade credit and terms analysis looks like
Annual sales of 36,500,000, or 100,000 a day, and purchases of 29,200,000 anchor the finished analysis, all illustrative. The supplier offers 2/10 net 30, and the firm pays on day 30. Skipping the discount is borrowing for 20 days at about 37 percent a year simply, or about 44.6 percent compounded. Borrowing 1,568,000 on the firm's 8 percent line to pay early costs about 125,000 and saves 584,000, a net gain near 459,000. The sales team wants customer terms stretched from 30 to 60 days, promising 5 percent more sales at a 20 percent margin, or 365,000. Carrying the larger receivables at variable cost ties up 2,640,000 more, 211,200 a year at 8 percent, and bad debts rise by about 210,000. That proposal loses about 56,000 a year, and the example declines it.
How a FIN-450 Topic 6 example is structured
Both proposals are treated as loans, one taken and one made. The case section describes the distributor, its sales, purchases and credit line, and marks every figure as illustrative. A cycle section computes the cash conversion cycle, 45 days of inventory plus 30 of receivables less 30 of payables, and shows what each proposal would do to it. The discount section converts the supplier's terms into an annual rate, first simply and then compounded, and compares it with the line. The customer proposal is priced next, adding the margin on new sales and subtracting the cost of carrying the receivables and the extra bad debts. A paragraph explains why receivables are carried at variable cost. One table then places both results together. The recommendation accepts the discount, declines the longer terms and names the bad-debt rate at which the terms would pay.
The cycle measured before either change
Forty-five days of inventory plus thirty of receivables less thirty of payables gives a 45-day cycle, which taking the discount would lengthen to 65.
Discount terms turned into a rate
Giving up 2 percent to keep the money 20 extra days costs about 37 percent a year simply and about 44.6 percent with compounding.
The line funds the early payment
Borrowing 1,568,000 at 8 percent to pay on day 10 costs about 125,000 a year against a 584,000 discount, so the longer cycle is cheaper.
Longer terms as a loan to customers
Stretching terms to 60 days adds 2,640,000 of receivables at variable cost, a loan whose 211,200 annual carrying cost the added margin must repay.
Bad debts that decide the terms
The terms would break even only if bad debts held near 1.35 percent of sales, below the 1.5 percent the case expects under looser credit.
Where marks go in FIN-450 Topic 6
Treating a shorter cash conversion cycle as always better is where this topic takes its first marks, since the cheaper decision here lengthens the cycle by 20 days. Papers that call the supplier discount a small saving, without converting it into an annual rate, miss that forgoing it is among the most expensive borrowing the firm does. Receivables carried at sales value rather than at the cost tied up in them overstate the financing charge, and a strong paper states which convention it uses. A terms proposal priced on added sales alone, with no carrying cost or bad-debt change, counts only the benefit. Using the compounded and simple rates interchangeably, without labeling them, muddles the comparison with the line. Recommendations with no break-even condition leave the sales team no figure to argue against.
Get a FIN-450 Topic 6 example written to your instructions
Send the FIN-450 Topic 6 instructions and the rubric shared in your classroom, with the case your section supplies. We write a custom example to them, with the cash conversion cycle measured, discount terms converted to an annual rate, receivables priced as a loan to customers and a break-even condition stated, in 24 to 48 hours. The first one is free.
FIN-450 Topic 6 questions, answered
How is the cost of skipping a supplier discount calculated?
By treating the discount as interest for the extra days of credit. Under 2/10 net 30, a buyer who pays on day 30 keeps 98 for 20 more days at a cost of 2. That is 2/98 for 20 days, about 37 percent a year when annualized simply and about 44.6 percent when compounded. Unless the firm's other borrowing costs more, taking the discount and borrowing elsewhere is cheaper.
Why carry receivables at variable cost?
Because the firm's actual investment in a sale made on credit is what it spent to produce or buy the goods, not the sale price, which includes margin not yet collected. Many textbooks carry added receivables at variable cost for that reason, while some use sales value for simplicity. The example states its convention, since the choice changes the financing charge and the answer should be traceable.
Should my company change its credit terms?
The analysis cannot decide that. The distributor, its sales, margins, bad-debt rates and borrowing cost are composites, chosen so both proposals can be priced clearly. A real decision depends on customer behavior, competitors' terms, collection experience and the firm's financing, none of which appears in the example. It demonstrates how FIN-450 wants working capital treated as a financing choice, and it is coursework rather than financial advice.