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

A supplier offers terms of '3/10, net 40' to Kalyani Traders. Assuming a 360-day year and ignoring compounding, what is the approximate annual implicit cost of forgoing the cash discount and paying on the last day?

The implicit annual cost of forgoing a 3/10 net 40 discount is about 37.1%. It is computed as 3/97 multiplied by 360/30, because the discount is earned on the net amount actually paid and the credit period gained is 30 days, which repeats 12 times a year.

  1. A28.5%
  2. B37.1%Correct
  3. C9.3%
  4. D30.0%

Explanation

Cost = [3/(100-3)] x [360/(40-10)] = 0.030928 x 12 = 37.11%. The option 28.5% would use 360/40 wrongly... in fact 3/100 x 360/30 = 36% uses the wrong base (discount on invoice price rather than net payment). 9.3% is the cost for one period only without annualising (0.0309 x 3 not applicable), and 30% is an arbitrary figure.

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