CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)
Supplier terms are '2/10, net 30'. Ignoring compounding and using a 360-day year, what is the approximate annual implicit cost of forgoing the cash discount?
The approximate annual cost of forgoing a 2/10 net 30 discount is 36.73%. It is computed as 2/98 multiplied by 360 divided by the 20 extra days of credit obtained by paying on day 30 instead of day 10.
- A36.73%Correct
- B24.49%
- C18.37%
- D12.24%
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% option wrongly uses a 30-day gap (360/30 = 12 gives 24.49%), which is the full credit period instead of the extra days gained.
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