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CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital

Roshni Traders buys goods on terms of 2/10, net 30. Assuming a 360-day year, what is the approximate annual percentage cost of forgoing the cash discount and paying on the last day of the credit period?

The cost is 36.73% per annum. Forgoing a 2% discount means paying 100 instead of 98, so the cost per period is 2/98. Paying on day 30 instead of day 10 gives 20 extra days, so the period repeats 360/20 = 18 times a year.

  1. A36.00%
  2. B36.73%Correct
  3. C24.49%
  4. D12.24%

Explanation

Cost = [Discount / (100 − Discount)] × [360 / (Credit period − Discount period)] = (2/98) × (360/20) = 0.020408 × 18 = 36.73%. The 36.00% option wrongly uses 2/100 as the base. The 24.49% option wrongly uses 30 days instead of 20 days as the extra credit period.

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