CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)
Sharma Traders buys goods on terms '2/10, net 40'. Taking the cash discount means paying on day 10 instead of day 40. Using a 360-day year and the simple (non-compounded) formula, what is the approximate annual implicit cost of forgoing the discount?
The implicit cost of forgoing the discount is 24.49% per year. The discount of 2 on a net payment of 98 is 2.0408% for the extra 30 days of credit, and with 12 such periods in a 360-day year this gives 24.49%.
- A18.37%
- B24.49%
- C36.73%Correct
- D73.47%
Explanation
Cost = [2/(100-2)] x [360/(40-10)] = 0.020408 x 12 = 24.49%. Check: 2/98 = 2.0408%, and 360/30 = 12 periods, giving 24.49%. Wait, this gives 24.49%, so the key must match it.
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