ACCA FM · Chapter 4 · Question 10 of 12
A supplier offers a 2% discount for payment within 15 days. The company currently pays after 60 days. What is the effective annual cost of NOT taking the discount, using compound interest and a 365-day year?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) 17.8%
Explanation
By not taking the discount the company effectively borrows $98 for 45 extra days at a cost of $2. Annual cost = (100/98)^(365/45) - 1 = 17.81%, or 17.8% to 1 decimal place. If the company can borrow more cheaply than this, it should take the discount. 16.6% is the simple-interest equivalent.
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