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CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)

Sharma Traders buys goods on terms '3/15, net 45'. Using the simple (non-compounded) formula on a 360-day year, what is the approximate annualised cost of forgoing the cash discount?

The annualised cost is 37.11%. The discount of 3 on a net payment of 97 gives 3.093% per period, and the credit extension is 45 minus 15 equals 30 days, so there are 12 periods in a 360-day year, giving 3.093% times 12.

  1. A24.74%Correct
  2. B18.56%
  3. C37.11%
  4. D7.20%

Explanation

Cost = [3/(100-3)] x [360/(45-15)] = 0.030928 x 12 = 37.11%? Check: 360/30 = 12, and 3/97 = 3.0928%, so 3.0928 x 12 = 37.11%. Hence the correct value is 37.11%, not 24.74%.

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