CA Intermediate · Financial Management and Strategic Management · Management of Receivables
Terms of sale at present are net 30. A firm considers offering '2/10, net 30'. What is the approximate annualised implicit cost to a customer of forgoing the discount and paying on day 30 (360-day year, simple basis)?
The annualised cost of forgoing the discount is about 36.73%. It equals 2/98 multiplied by 360/20, since paying 20 days later costs 2.04% of the amount, and that period repeats 18 times in a year on a simple basis.
- A36.73%Correct
- B24.49%
- C73.47%
- D2.04%
Explanation
Cost = [2/(100-2)] x [360/(30-10)] = 0.020408 x 18 = 36.73%. 24.49% wrongly uses a 40-day gap-type error, 73.47% doubles the result, and 2.04% omits annualisation.
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