A supplier offers credit terms of 2/10, net 40. Assuming 365 days in a year and using simple annualisation, the approximate annual cost of not taking the cash discount and paying on day 40 is:

Correct answer: B) 24.83%

Explanation

Paying on day 40 instead of day 10 gives 30 extra days of credit at a cost of 2% of the invoice, that is, ₹ 2 for the use of ₹ 98. Annual cost = (2/98) x (365/30) = 0.020408 x 12.1667 = 24.83%. Using the full 40 days as the credit period gives 18.62%, which is wrong because the discount is lost only for the extra 30 days.