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CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)

A supplier offers terms of 2/10, net 30. Using 360 days in a year and the simple (non-compounded) formula, what is the approximate annual implicit cost of forgoing the cash discount?

The implicit cost of forgoing the discount is about 36.73% per year. It is computed as 2 divided by 98, multiplied by 360 divided by 20 days of extra credit. The firm gives up 2% to delay payment by 20 days, which is expensive financing.

  1. A36.73%Correct
  2. B24.49%
  3. C18.37%
  4. D12.24%

Explanation

Cost = [2/(100-2)] x [360/(30-10)] = 0.020408 x 18 = 36.73%. The 24.49% figure uses 360/30 = 12 instead of the 20-day credit extension period. The 18.37% figure uses the discount over 100 rather than 98 with a wrong period, and 12.24% is similarly mis-based.

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