Question

Collins inc. purchases goods from its suppliers on terms 3/20 net 40. The effective annual cost to collins if it does not take the discount and pay on day 50 is?

Answer 1

The discount is 3 if paid within 20 days; therefore, the actual payments is (100 – 3 =) 97.

If the discount is not availed, the payment is 100 and it is made in 50 days.

Gap of days = 50 – 20 = 30

There are 365 days in a year

Effective cost = [(100/97) ^ (365/30)] – 1

                        = [1.030927 ^ 12.16667] – 1

                        = 1.44857 – 1

                        = 0.44857

By a multiplication of 100; (0.44857 × 100 =) 44.86% (Answer)