Your project requires 2,000 cubic yards of concrete. Supplier A offers $95/CY with 30-day terms, Supplier B offers $92/CY with payment due on delivery, and Supplier C offers $98/CY with 60-day terms. If your cost of capital is 8% annually, which supplier offers the best value?
Correct Answer
C) Supplier C
Considering time value of money: Supplier A = $95 discounted by 30 days = ~$94.37/CY; Supplier B = $92/CY; Supplier C = $98 discounted by 60 days = ~$96.70/CY. Total costs: A=$188,740, B=$184,000, C=$193,400. Supplier B offers the best value.
Why This Is the Correct Answer
The explanation contains an error - it states Supplier C is correct but then shows Supplier B has the lowest total cost. Based on the calculations provided, Supplier B actually offers the best value at $184,000 total cost, making option B the correct answer, not C. The time value of money analysis correctly shows that even with payment terms considered, Supplier B's immediate payment requirement still results in the lowest overall cost.
Why the Other Options Are Wrong
Option A: All suppliers offer equivalent value
Supplier C's cost of $193,400 (after time value adjustment) is the highest of all three options, making it the worst value despite having the longest payment terms.
Option B: Supplier A
CORRECT_ANSWER - Supplier B offers the best value at $184,000 total cost despite requiring immediate payment.
Option D: Supplier B
The suppliers clearly offer different values when time value of money is considered, with costs ranging from $184,000 to $193,400.
Memory Technique
Remember 'PV-TVM': Present Value using Time Value of Money. Longer payment terms = discount the price back to today's dollars using your cost of capital to find the true cost.
Reference Hint
Florida Building Construction Standards - Chapter on Project Cost Analysis and Financial Management, or Business and Finance for Contractors section covering time value of money calculations.
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