The cost of giving up a cash discount under the terms of sale 5/20 net 120 (assume a 360-day year) is ________.
A) 15 percent
B) 18.9 percent
C) 15.8 percent
D) 20 percent

Question

Quizplus · Accepted Answer

The cost of giving up a cash discount is calculated using the formula: $$ \text{Cost} = \frac{\text{Discount \%}}{100\% - \text{Discount \%}} \times \frac{360}{\text{Payment days} - \text{Discount period}} $$ For the terms 5/20 net 120, the discount is 5%, the discount period is 20 days, and the full payment period is 120 days. Plugging these values into the formula gives: $$ \text{Cost} = \frac{5\%}{95\%} \times \frac{360}{120 - 20} = \frac{0.05}{0.95} \times \frac{360}{100} = 0.05263 \times 3.6 = 0.18947 $$ or 18.9 percent.

The Cost of Giving Up a Cash Discount Under the Terms