Question

You work as an accounts payable accountant and receive an invoice from a supplier with 4/8,...

You work as an accounts payable accountant and receive an invoice from a supplier with 4/8, net 45 credit terms. What would be the effective cost of not taking the discount?

B. 25.25%

A. 18.65%

C. 44.65%

D. 48.01%
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Homework Answers

Answer #1

The Term 4/8, net 45 Means The 4% Discount will be applied if payable within 8 days otherwise the amount has to be paid in 45 days but discount will not be applicable.

Effective cost = Discount % / ( 100 - Discount %) * ( 360 / Total Payment days - discount days)

= 4%/ (100 - 4%) * ( 360 / (45 - 8))

= (0.04 / 0.96) * (360 / 37)

= 0.0416666667 * 9.72972

= 0.40540 or 40.540%

Annualized cost of not taking credit = 40.540%

[Note : All the given options are incorrect]

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