CA Intermediate · Financial Management and Strategic Management · Management of Receivables
A firm offers terms of 2/10 net 30. Using a 360-day year and the simple (non-compounded) approach, what is the approximate annualised cost to a customer of forgoing the cash discount?
The annualised cost of forgoing the discount is 2/98 multiplied by 360/20, which equals about 36.73%. The discount period is 10 days and credit period 30 days, so the extra credit obtained is 20 days, giving 18 periods in a year.
- A36.73%Correct
- B24.49%
- C18.37%
- D2.04%
Explanation
Cost = [2/(100−2)] × [360/(30−10)] = 0.020408 × 18 = 36.73%. The 24.49% figure uses a 30-day credit period instead of 20 days (360/30=12). The 2.04% ignores annualisation.
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