US CMA Part 2 · Chapter 4 · Question 1 of 15
A supplier offers terms of 2/10, net 40. Using a 365-day year and simple interest, what is the approximate annual cost of NOT taking the discount and paying on day 40?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 24.83%
Explanation
Annual cost = [discount % / (100% - discount %)] x [365 / (total period - discount period)] = (2 / 98) x (365 / 30) = 0.020408 x 12.1667 = 24.83%. Forgoing the discount is equivalent to borrowing $98 for 30 days at a cost of $2, which is very expensive financing.
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