Lory Corporation Has Variable Cost Per Unit of £

question 16

Essay

Lory Corporation has variable cost per unit of £.35 per £1 of sales.The firm offers a 2% discount for orders paid within 15 days if the customer increases their order size by 5%.A customer normally orders £75,000,and is considering the discount.Normally,the customer pays within 30 days with no discount.Lory 's cost of debt capital is 12%.Would Lory be wise to offer the discount?
Calculate the NPV of the decision.

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Definitions:

Reserve Requirements

Regulations set by central banks regarding the minimum amount of reserves that banks must hold against deposits.

Monetary Policy

The process by which a central bank controls the supply of money in an economy, typically to achieve objectives like controlling inflation or promoting growth.

Negative Excess Reserves

A situation where banks have less reserves than the required minimum, potentially leading to liquidity problems.

Federal Funds Market

The Federal Funds Market is a financial market that allows banks to borrow or lend excess reserves to each other on an overnight basis, with interest rates known as the federal funds rate.