Question

Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 3/18, net 70. Mr. Warner never takes the discount offered, but he pays his suppliers in 60 days rather than the 70 days allowed so he is sure the payments are never late.

What is Mr. Warner's cost of not taking the cash discount? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Answer 1

cost of not taking cash discount : [Discount /(100-discount ) ]*[360 /(payment days-discount days)]

                  = [3 /(100-3)]*[360 /(60-18)]

                   = [3/97] *[360 / 42]

                    = .03093* 8.57143

                    = .2651 or 26.51%