The cost of not taking the trade discount is: (360 / [45 – 10]) × .02 / .98 = 10.2857 × .020408 = .2099 or 20.99% This is higher than the company’s borrowing cost of 12%. Therefore, Global should pay within the first ten days because the cost of not taking the trade discount is greater than the cost of borrowing.
Paying the supplier after the 10-day discount period is using debt. The debt is owed to the supplier, and it has an interest cost. The interest cost is the difference between the gross amount due the supplier if paid after the discount period and the net amount that would be paid if the invoice is paid within the 10-day discount period. The decision of whether or not to take the discount should be based on whether the interest imputed in not taking the discount is greater than the interest cost to borrow the funds to pay within the discount period. Even if the company does not need to borrow to pay within the discount period, it will have a cost for paying within the discount period. The cost will be an opportunity cost — the interest the company could have earned had it invested the funds for 35 additional days (45 days minus 10 days) before paying the invoice.
It is true that the cost of the trade credit exceeds the company's cost of borrowing. However, that does not mean that Global should not pay within the first ten days to get the discount.
Even if the company does not need to borrow to pay within the discount period, it will have a cost for paying within the discount period. The cost will be an opportunity cost — the interest the company could have earned had it invested the funds for 35 additional days (45 days minus 10 days) before paying the invoice.
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