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CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital

A supplier offers terms of 3/10, net 40. Kiran Traders forgoes the discount and pays on day 40. Using 360 days and the simple (non-compounded) formula, the approximate annual cost of forgoing the discount is closest to:

The annual cost is about 37.1%. The discount of 3 on a net payment of 97 gives 3.093% for the extra 30 days of credit, and multiplying by 360/30, which is 12, gives 37.1%. Since this exceeds typical bank borrowing rates, taking the discount is preferable.

  1. A33.4%
  2. B37.1%Correct
  3. C27.8%
  4. D9.3%

Explanation

Cost = 3/(100-3) x 360/(40-10) = 0.030928 x 12 = 37.1%. Option 33.4% wrongly uses 3/100 x 360/30 ... which is 36%, and 27.8% uses a wrong period. Option 9.3% takes a 30-day period unannualised.

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