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

Kapoor Traders buys goods on credit terms of 2/10, net 40. Taking a 360-day year and ignoring compounding, what is the approximate annualised cost of forgoing the cash discount and paying on the 40th day?

The cost is about 24.49% per annum. The discount of 2 on a net payment of 98 is 2/98, and paying 30 days later (day 40 instead of day 10) means the period repeats 360/30 = 12 times a year, giving 2.0408% × 12 = 24.49%.

  1. A18.37%
  2. B24.00%
  3. C24.49%Correct
  4. D73.47%

Explanation

Cost = [Discount/(100 − Discount)] × [360/(Credit period − Discount period)] = (2/98) × (360/30) = 0.020408 × 12 = 24.49%. Using 2/100 gives 24.00%, a wrong base. Using 360/40 gives 18.37%, which wrongly uses the full credit period. Using 360/10 gives 73.47%, which ignores the days already available after the discount period.

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