CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)
Kaveri Traders buys goods on terms '3/15, net 45'. Using a 360-day year and the simple (non-compounded) formula, what is the implicit annual cost of not taking the discount, to the nearest two decimals?
The implicit annual cost is 37.11%. The discount of 3 on a net 97 payment is 3/97, and the extra credit gained by paying on day 45 instead of day 15 is 30 days, so the annualising factor is 360/30, equal to 12.
- A37.11%Correct
- B24.74%
- C74.23%
- D12.37%
Explanation
Cost = (3/97) x (360/(45 - 15)) = 0.030928 x 12 = 37.11%. The 74.23% option wrongly uses 360/15 = 24, doubling the effect by using the discount period rather than the extra credit days.
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