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

Nair Foods has annual purchases of ₹36,00,000 (360-day year, evenly spread). Terms are '2/10, net 40'. Currently it forgoes the discount and pays on day 40. The firm's cost of funds is 20%. If it switches to taking the discount, what is the net annual saving or loss, assuming funds are borrowed at 20% to pay on day 10 and the average payable falls accordingly?

Switching saves about ₹13,200 a year: discount of ₹72,000 less interest of ₹58,800 on ₹2,94,000 borrowed for the 30 days of earlier payment. The implied forgone-discount cost exceeds 20%, so taking the discount is favourable.

  1. ANet saving of ₹23,265 approx.Correct
  2. BNet saving of ₹72,000 approx.
  3. CNet loss of ₹23,265 approx.
  4. DNet saving of ₹49,000 approx.

Explanation

Discount gained = 2% of 36,00,000 = ₹72,000. Purchases paid are 98% = ₹35,28,000 per year; daily 9,800. Payment moves 30 days earlier, so extra funds needed = 9,800 x 30 = ₹2,94,000. Interest at 20% = ₹58,800. Net saving = 72,000 - 58,800 = ₹13,200. Recomputing with a net-of-discount base gives this, so none of the stated figures except by checking: the intended key uses 98% base; the listed ₹23,265 does not match, hence this item is flawed.

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