Clarkson Lumber Case 2
Clarkson Lumber’s Company
Case Analysis Part 2
GROUP A:
ANA GABRIELA SOTILLO JOHNSON
FABIAN FREIHERR VON ROSEN
IMRE IGNACIO SZAPARY GIL-CASARES
RAYAN SEIF
STEFAN RADISAVLJEVIC
VERENA RIEDHART
YANIS ALEM
IE business School
Section 4
September 2014
Question 1. How attractive is it to take the trade discounts?
In order to determine how attractive it is to avail the trade discounts, Clarkson should calculate his annualized interest rate which he can get in return if he avails the trade discount. If this annualized interest rate is greater than the interest rate charged from a bank loan, then Clarkson should go for the discount. Whereas, if the interest rate to borrow the money from a bank is greater than the annualized interest rate earned by taking the discount, then Clarkson should not take the discount. We should also outline, that the best option is to pay later, but we assume that from 1996 vendors will set the deadline of payment around 30 days.
In our example we are taking 360 days based on the assumption that company works 360 days taking 2% discount from the suppliers by paying earlier.
We will therefore calculate the annualized interest rate from the formula below:
Annualized Interest from the Trade Discounti
=
Discount %
100% - Discount %
×
360
Credit Days - Discount Days
(Number of Loan days)
We can see that if Clarkson takes the discount, he gets a hefty 36.73% interest from the trade discount assuming 30 days for credits and a discount of 2% if paid on the 10th day of the purchase. This means that for every annual purchase of 1 million dollar, Clarkson will get an interest of 367,730 dollars. So in this scenario, the option for a trade discount is quite impressive so Clarkson should go for the discount.
Question 2. Prepare full set of financial statements (BS, IS, CFS) for 1996 through 2001 for two different strategies:
a. grow with 10% annual rate and use purchase discount (all discount is taken)
b. grow with 25% annual rate
Case Analysis Part 2
GROUP A:
ANA GABRIELA SOTILLO JOHNSON
FABIAN FREIHERR VON ROSEN
IMRE IGNACIO SZAPARY GIL-CASARES
RAYAN SEIF
STEFAN RADISAVLJEVIC
VERENA RIEDHART
YANIS ALEM
IE business School
Section 4
September 2014
Question 1. How attractive is it to take the trade discounts?
In order to determine how attractive it is to avail the trade discounts, Clarkson should calculate his annualized interest rate which he can get in return if he avails the trade discount. If this annualized interest rate is greater than the interest rate charged from a bank loan, then Clarkson should go for the discount. Whereas, if the interest rate to borrow the money from a bank is greater than the annualized interest rate earned by taking the discount, then Clarkson should not take the discount. We should also outline, that the best option is to pay later, but we assume that from 1996 vendors will set the deadline of payment around 30 days.
In our example we are taking 360 days based on the assumption that company works 360 days taking 2% discount from the suppliers by paying earlier.
We will therefore calculate the annualized interest rate from the formula below:
Annualized Interest from the Trade Discounti
=
Discount %
100% - Discount %
×
360
Credit Days - Discount Days
(Number of Loan days)
We can see that if Clarkson takes the discount, he gets a hefty 36.73% interest from the trade discount assuming 30 days for credits and a discount of 2% if paid on the 10th day of the purchase. This means that for every annual purchase of 1 million dollar, Clarkson will get an interest of 367,730 dollars. So in this scenario, the option for a trade discount is quite impressive so Clarkson should go for the discount.
Question 2. Prepare full set of financial statements (BS, IS, CFS) for 1996 through 2001 for two different strategies:
a. grow with 10% annual rate and use purchase discount (all discount is taken)
b. grow with 25% annual rate