CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)
A supplier offers terms of '2/10 net 30'. Ignoring compounding and using a 360-day year, what is the approximate annualised implicit cost of forgoing the cash discount and paying on the 30th day (to the nearest whole per cent)?
The approximate annual cost of forgoing the discount is 37%. The discount of 2 on an effective payment of 98 is 2.04%, and the 20 extra days of credit let this be earned 18 times in a 360-day year, giving about 36.7%.
- A36%
- B37%Correct
- C24%
- D18%
Explanation
Cost = [2/(100-2)] x [360/(30-10)] = 0.020408 x 18 = 36.73%, i.e. about 37%. The 36% option divides by 100 instead of 98 (wrong base: 2/100 x 18). The 24% option wrongly uses 30 days in the denominator instead of 20 (360/30 = 12; 2.04 x 12 = 24.5).
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