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CMA Intermediate · Financial Management and Business Data Analytics · Payable Management

Suppliers to Kavya Traders offer terms of 2/10, net 30. Using the simple (non-compounded) approach on a 360-day year, what is the approximate annual implicit cost of forgoing the discount and paying on the net due date?

The implicit cost is about 36.73% per annum. The discount of 2% on a net price of 98 is lost to gain 20 extra days of credit, so cost is 2/98 multiplied by 360/20, which equals 36.73%.

  1. A24.49%
  2. B36.73%Correct
  3. C18.37%
  4. D73.47%

Explanation

Cost = [2/(100-2)] x [360/(30-10)] = 0.020408 x 18 = 36.73%. Option 24.49% uses 12 days of credit instead of 20 in the denominator wrongly (360/30 gives 24.49%), ignoring the discount period. 18.37% uses 360/40 and 73.47% uses 360/10, both wrong periods.

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