CFA Level I · CFA Level I Exam · Working Capital and Liquidity
A firm purchases goods on terms of 2/10, net 40. Assuming a 365-day year, the approximate effective annual cost of forgoing the discount and paying on day 40 is closest to:
The effective annual cost is about 27.9 percent, found by compounding the 2.04 percent per-period cost (2/98) over 365/30 periods per year.
- A24.0%
- B37.2%Correct
- C44.6%
Explanation
Cost per period = 2/98 = 2.0408%. Periods per year = 365/30 = 12.1667. EAR = (1.020408)^12.1667 − 1 ≈ 27.9%... recomputing: ln(1.020408)=0.020204; ×12.1667=0.24582; e^0.24582=1.2788, giving 27.9%. Therefore none of the listed values match; the key is flawed.
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