CA Intermediate · Financial Management and Strategic Management · Management of Receivables
Arvind Ltd sells on terms of 2/10, net 40. Assume a 360-day year. Customers who take the discount pay on day 10. What is the approximate annualised implicit cost to the customer of forgoing the discount, using the simple (non-compounded) formula?
The implicit annual cost of forgoing the discount is 24.49%. It is calculated as 2/98 multiplied by 360/30, since the customer gains 30 extra days of credit by paying on day 40 instead of day 10, at a discount of 2 on every 98 effectively paid.
- A24.49%Correct
- B18.00%
- C20.00%
- D16.33%
Explanation
Cost = [2/(100-2)] x [360/(40-10)] = 0.020408 x 12 = 24.49%. Using 2/100 x 12 gives 24%, not an option, while 18% and 16.33% come from using wrong periods (40 days or 45 days as the denominator).
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