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

Sharma Exports discounts a bill of ₹10,00,000 with its bank for 90 days. The bank charges discount at 12% p.a. (year = 360 days), deducted upfront, plus a processing fee of 1% of the bill value. What is the effective annual cost of this financing, to the nearest two decimals?

The effective cost is 16.67% per year. The firm pays ₹30,000 discount plus ₹10,000 fee, so it receives only ₹9,60,000 for 90 days. The cost is 40,000/9,60,000 for the period, and multiplying by 4 periods a year gives 16.67%.

  1. A16.67%Correct
  2. B16.00%
  3. C12.37%
  4. D13.00%

Explanation

Discount = 10,00,000 × 12% × 90/360 = ₹30,000. Fee = ₹10,000. Total cost = ₹40,000. Net cash received = 10,00,000 − 40,000 = ₹9,60,000. Effective cost = (40,000/9,60,000) × (360/90) = 4.1667% × 4 = 16.67%. The 16.00% option uses the bill value instead of the net proceeds as the base.

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