CS Executive · Corporate Accounting and Financial Management · Working Capital Management
Mehta Foods buys on terms 2/10 net 40 and invoices are Rs 1,00,000. Using a 360-day year and the simple (non-compounded) formula, what is the approximate annual cost of forgoing the discount and paying on day 40?
The approximate annual cost is 24.49%. Forgoing a 2% discount means paying Rs 100 instead of Rs 98 for an extra 30 days. The cost is 2/98 multiplied by 360/30, which equals about 24.49%. Using 2/100 gives 24%, which is wrong.
- A24.00%
- B24.49%Correct
- C16.33%
- D12.24%
Explanation
Cost = [2/(100-2)] x [360/(40-10)] = 0.020408 x 12 = 24.49%. Using 2/100 instead of 2/98 gives 24.00%, which is the mistake of using the wrong base. Using 360/40 gives about 18.4%, not an option, and 16.33% results from 360/45 style errors.
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