CA Intermediate · Financial Management and Strategic Management · Management of Receivables
A firm offers terms of '2/10, net 30' to its customers. Using the simple (non-compounded) approach with a 360-day year, what is the approximate annualised cost of forgoing the discount, to the nearest whole percent?
The annualised cost of forgoing a 2/10 net 30 discount is about 37%. It is computed as 2 divided by 98, multiplied by 360 divided by the 20 extra days of credit. Customers who skip the discount effectively borrow at this high rate.
- A37%Correct
- B24%
- C18%
- D73%
Explanation
Cost = 2/(100−2) × 360/(30−10) = 0.020408 × 18 = 36.7%, about 37%. The 24% option wrongly uses 2/100 ×... or ignores the denominator adjustment; 73% uses a 10-day credit period.
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