The annual cost of forgoing a cash discount under the terms of sale 2/30 n/90,assuming a 365-day year is:

Question

Quizplus · Accepted Answer

The terms 2/30 n/90 means that the buyer can either take a 2% discount if they pay within 30 days or pay the full amount within 90 days. To calculate the cost of forgoing the discount, we use the following formula: 
Cost of forgoing discount = (Discount % / (100 - Discount %)) x (Days in a year / (Full payment period - Discount period))
= (2/(100-2)) x (365/(90-30))
= 0.0274 or 2.74%
Therefore, the annual cost of forgoing the cash discount is 2.74%. The closest answer option is C, which is 12.4%, but that is too high. The other answer options, A (8.0%) and B (12.2%), are too low.

The Annual Cost of Forgoing a Cash Discount Under the Terms