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CMA Intermediate · Financial Management and Business Data Analytics · Payable Management

Nair Enterprises buys on terms 1/15, net 45 for Rs 9,90,000 invoice value before discount. The firm can invest surplus cash at 10% p.a. Using a 360-day year and the simple formula, which statement is correct?

The cost of foregoing is 12.12%, so Nair should pay on day 15 and take the discount. Annualising 1/99 over a 30-day extension (360/30 = 12) gives 12.12%, which beats the 10% earnable by investing the cash.

  1. ACost of foregoing is 12.12%, so take the discount by paying on day 15 and forgo investing the cashCorrect
  2. BCost of foregoing is 12.12%, so pay on day 45 and invest the cash
  3. CCost of foregoing is 8.08%, so take the discount
  4. DCost of foregoing is 24.24%, so pay on day 45

Explanation

Cost = 1/99 x 360/30 = 0.010101 x 12 = 12.12%. This exceeds the 10% investment return, so paying early to earn the discount is better. Paying on day 45 would give up a 12.12% return to earn only 10%.

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