CMA Intermediate · Financial Management and Business Data Analytics · Receivable Management
Sharma Traders offers terms of 2/10 net 30. Using the simple approximation with a 360-day year, what is the annualised implicit cost to the buyer of foregoing the discount?
The cost is 36.73%. The buyer forgoes a 2 rupee discount on 98 rupees of funds for 20 extra days, so 2/98 multiplied by 360/20 gives 36.73% annually.
- A36.73%Correct
- B24.49%
- C40.00%
- D18.00%
Explanation
Cost = [2/(100-2)] x [360/(30-10)] = 0.020408 x 18 = 0.3673, i.e. 36.73%. The 40.00% option wrongly uses 2/(100) x 360/18 style base, ignoring that the buyer effectively pays 98 for the use of funds. The 24.49% option uses a 240-day factor.
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