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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Working Capital Management

Kaveri Traders buys goods on terms '2/10, net 30'. It forgoes the discount on a purchase invoice of ₹1,00,000 and pays on day 30. Using a 360-day year and the simple formula, the approximate annualised cost of this trade credit is:

The annualised cost of forgoing the 2/10 net 30 discount is about 36.7%. It is computed as 2/98 multiplied by 360/20, since the extra credit gained is only 20 days. This makes trade credit an expensive source compared with most bank finance.

  1. A36.7%Correct
  2. B24.5%
  3. C18.0%
  4. D37.2%

Explanation

Cost = [2/(100-2)] x [360/(30-10)] = 0.020408 x 18 = 36.73%, i.e. 36.7%. The 24.5% figure wrongly uses a 30-day credit period (360/30 = 12) instead of 20 days. The 18.0% figure ignores the denominator adjustment and uses 1% per 10 days, and 37.2% is unsupported.

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