A company is offered credit terms of 2/10 n/40,but decides to forgo the cash discount and pay on the 45th day.What is the company's cost of forgoing the cash discount?
A) 18.6%
B) 21.28%
C) 24.83%
D) None of the given answers

Question

Quizplus · Accepted Answer

The credit terms 2/10 n/40 mean that the company can get a 2% discount if they pay within 10 days or they have to pay the full amount within 40 days.

If the company forgoes the cash discount and pays on the 45th day, they are essentially borrowing money from the supplier for an additional 5 days.

To calculate the cost of forgoing the discount, we need to find the effective annual interest rate (EAR) for the 5-day loan.

EAR = [(1+((Discount %)/(100-Discount %))*((365/Days in credit period))-1]*100

Plugging in the values, we get:

EAR = [(1+((2)/(98))*((365/30))-1]*100 = 24.83%

Therefore, the company's cost of forgoing the cash discount is 24.83%.

Option B is the correct answer.

A Company Is Offered Credit Terms of 2/10 N/40,but Decides