CA Intermediate · Financial Management and Strategic Management · Types of Financing
Dev Industries is considering a ₹10,00,000 term loan repayable in a lump sum after 1 year, and alternatively trade credit. Its supplier offers terms of 2/10, net 40 on purchases. Using a 360-day year and the simple (non-compounded) formula, what is the approximate annual cost of forgoing the cash discount?
The approximate annual cost of forgoing the discount is 24.49%. It is computed as discount divided by the amount actually paid, 2/98, multiplied by 360 divided by the extra credit days, 30, giving 0.0204 x 12 = 24.49%.
- A24.49%Correct
- B18.00%
- C29.39%
- D24.00%
Explanation
Cost = (2/98) x (360/(40-10)) = 0.020408 x 12 = 24.49%. The 24.00% option uses 2/100 instead of 2/98, a wrong base. The 18.00% option uses 360/40 without subtracting the discount period.
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