CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)
Under the trade credit terms "3/15, net 60", a buyer chooses to skip the discount and pay on the 60th day. Taking a 360-day year and ignoring compounding, what is the approximate annual implicit cost of this trade credit?
The implicit annual cost of forgoing a 3/15, net 60 discount is about 24.74%. It equals 3/97 multiplied by 360 over the 45 extra days of credit. The buyer pays that rate by delaying payment, so borrowing cheaper than this is better.
- A24.74%
- B25.77%Correct
- C29.00%
- D9.28%
Explanation
Cost = [Discount/(100 - Discount)] x [360/(Credit period - Discount period)] = (3/97) x (360/45) = 0.030928 x 8 = 24.74%. Checking: 3/97 = 3.0928%; times 8 = 24.74%. So the correct value is 24.74%, which is option 0, not option 1. Re-evaluating: option 1 (25.77%) arises from using 3/97... no, 25.77% = (3/100)x(360/45)... that gives 24%. 25.77% is wrong.
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