You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%. But since your firm is not taking discounts and is paying on Day 20, what is the effective annual cost (not the nominal cost) of your firm's current practice, using a 365-day year?

Question

Quizplus · Accepted Answer

To find the effective annual cost, we need to use the formula: Effective Annual Cost = (1 + Discount % / (100% - Discount %))^365/Number of Days Payable - 1. 
Since the firm is currently paying on Day 20, the number of days payable is 20. 
Substituting the values, we get: Effective Annual Cost = (1 + 2% / (100% - 2%))^365/20 - 1 = 0.635 or 63.5%. 
Therefore, the answer is choice B, 63.5%.

You Point Out That the Nominal Cost of Not Taking