CMA Intermediate · Financial Management and Business Data Analytics · Payable Management
Gupta Traders is offered terms of 2/10, net 40 by its supplier. Using the simple (non-compounded) annualised formula with a 360-day year, what is the approximate annual implicit cost of forgoing the discount and paying on day 40?
The implicit cost is about 24.49% a year. Forgoing a 2% discount costs 2/98 for extra credit of 30 days, and annualising with 360/30 equals 12 periods, giving roughly 24.49%.
- A24.49%Correct
- B18.00%
- C12.24%
- D36.73%
Explanation
Cost = 2/(100-2) x 360/(40-10) = 0.020408 x 12 = 24.49%. Omitting the 98 base and using 2% gives 24.00% style errors; 12.24% uses 15 days instead of 30 for the period. Using 40 days instead of 30 gives 18.37%. 36.73% arises from using 20 days.
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