Ningbo Steel was extended credit terms of 3/15 net 30. If the firm were able to stretch its accounts payable to 50 days without damaging its credit rating, the cost of giving up the cash discount would only be

Question

Quizplus · Accepted Answer

The cost of giving up the cash discount can be calculated by finding the annual percentage cost of the cash discount and then extrapolating it to the number of days it is given up.

Annual percentage cost of the cash discount = (Discount % / (100% - Discount %)) x (365 / (Full credit period - Discount period))
= (3 / 97) x (365 / (30 - 3))
= 0.37216 or 37.22%

Therefore, if Ningbo Steel gave up the cash discount and extended their accounts payable period to 50 days, the cost would be:
= (37.22% / (365 / 50)) x 100
= 3.2234 or 32.23%

Thus, the best choice is B) as the cost of giving up cash discount would only be 32.23%.

Ningbo Steel Was Extended Credit Terms of 3/15 Net 30