Determine the effective annualized cost of forgoing the trade discount on terms 2/15 net 65.
A) 11.30%
B) 14.69%
C) 32.6%
D) 48.98%

Question

Quizplus · Accepted Answer

To calculate the effective annualized cost of forgoing the trade discount, we need to find the cost of financing the amount equivalent to the trade discount for the period between the payment due date and the end of the discount period.

The trade discount offered is 2%, meaning if the payment is made within 15 days, the buyer can deduct 2% from the invoice amount. Therefore, the effective period of credit for the buyer is 65-15 = 50 days.

To calculate the cost of financing, we can use the formula:

Effective Annualized Cost = (Discount % / (100-Discount %)) x (365 / (Full allowed payment days - Discount period days))

= (2 / 98) x (365 / 50)

= 14.69%

Therefore, the effective annualized cost of forgoing the trade discount on terms 2/15 net 65 is 14.69%.

The best choice is B.

Determine the Effective Annualized Cost of Forgoing the Trade Discount