CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)
Supplier invoices to Kaveri Traders carry terms "3/15, net 45". If Kaveri forgoes the cash discount and pays on day 45, what is the approximate annualised implicit cost of this trade credit, using the simple formula with a 360-day year?
The implicit cost is about 37.11% per year. The discount of 3% on a net payment of 97 is forgone to gain 30 extra days, and a 360-day year gives 12 such periods, so 3/97 multiplied by 12 equals 37.11%.
- A9.28%
- B36.00%
- C37.11%Correct
- D27.84%
Explanation
Cost = [3/(100-3)] x [360/(45-15)] = 0.030928 x 12 = 37.11%. Option 36.00% ignores the discount base (uses 3% x 12). Option 9.28% omits annualisation by using only 3/97 x 3, and 27.84% uses 3/97 x 9, a wrong period factor.
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