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CA Intermediate · Financial Management and Strategic Management · Management of Receivables

A supplier offers credit terms of 2/10, net 40. Using a 365-day year, what is the approximate annualised cost to a buyer of forgoing the cash discount and paying on the 40th day?

The annualised cost is about 24.83%. The buyer effectively borrows 98 per 100 invoiced, pays 2 extra for 30 additional days of credit, and so the cost is 2/98 multiplied by 365/30. Using 100 as the base or the wrong number of days gives incorrect figures.

  1. A24.83%Correct
  2. B24.33%
  3. C18.62%
  4. D74.49%

Explanation

Cost = [2/(100-2)] × [365/(40-10)] = 0.020408 × 12.1667 = 24.83%. Using 2/100 as the base gives 24.33%, which is wrong because the amount effectively borrowed is 98. Using 40 days instead of the 30-day extra credit gives 18.62%, and using a 10-day period gives 74.49%.

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