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Duckworth Enterprises’ has received offers from four
potential suppliers all of which have virtually identical product
quality, delivery times and warranties. The only difference is the
credit terms being offered. The terms offered by each supplier
are:

Supplier Terms

A 1/14, net 40

B 2/7, net 28

C 1/10, net 60

Assuming Duckworth Enterprises’ can borrow short-term funds
from its bank at an effective annual rate of 8.0% which of the
following statements is true?

a. Discounts from suppliers A and B should be taken because
the effective cost of the discount is greater than the effective
cost of the bank

b. Discounts from supplier C should be taken because the
effective cost of the discounts is less than the effective cost of
the bank

c. Discounts from suppliers A and B can be missed or foregone
because the effective cost of the discount is greater than the
effective cost of the bank

d. None of the discounts should be missed because the cost of
a discount missed will always be greater than the cost of funds
borrowed to pay within the discount period.

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