CA Intermediate · Financial Management and Strategic Management · Types of Financing
Sharma Traders sells goods on credit terms of 2/10, net 30. The cost of foregoing the cash discount and paying on the last day, using the simple (non-compounded) formula on a 360-day year, is closest to:
The cost of forgoing the discount is about 36.73% per year. It is computed as 2/98 multiplied by 360 divided by the 20 extra days of credit (30 minus 10). Using the full 30 days instead of 20 would wrongly give 24.49%.
- A24.49%
- B36.73%Correct
- C2.04%
- D18.37%
Explanation
Cost = [Discount/(100 - Discount)] x [360/(Credit period - Discount period)] = (2/98) x (360/20) = 0.020408 x 18 = 36.73%. The 24.49% figure wrongly uses 360/30 (full credit period) instead of 20 days. 2.04% is only the per-period cost without annualising.
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