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CA Intermediate · Financial Management and Strategic Management · Management of Receivables

Sharma Traders offers credit terms of 2/10 net 40 to its customers. Assuming a 360-day year, the annualised implicit cost to a customer of forgoing the cash discount and paying on day 40 is closest to:

The annualised cost is 24.49%. The discount of 2% is earned on a net amount of 98, and paying 30 days later (day 40 instead of day 10) lets this cost be repeated 12 times a year on a 360-day basis, giving 2/98 x 12.

  1. A18.37%
  2. B24.00%
  3. C24.49%Correct
  4. D36.73%

Explanation

Cost = [2/(100-2)] x [360/(40-10)] = 0.020408 x 12 = 24.49%. Using 40 days instead of 30 gives 18.37%, ignoring the 98 base gives 24.00%, and using a 20-day period gives 36.73%.

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