Question

Mr. Hugh Warner is a very cautious businessman. His supplier offer trade credit terms of 3/17, net 65. Mr. Warner never takes the discount offered, but he pays his supplier in 55 days rather than the 65 days allowed so he is sure the payment are never late.

what is Mr. Warner's cost of not taking the cash discount?

Answer 1

Trade terms 3/17 net 65 means if Mr. Warner makes payment within 17 days, we will be eligible for 3% cash discount. However, in any case, Mr. Warner has to make payment in 65 days.

Mr. Warner pays his supplier in 55 days

If he pays his suppliers in 17 days, discount = 3%

Therefore, he can get discount if he pays 38 days earlier (55-17)

Therefore cost of not taking cash discount = 3% / 97 x 365 / 38 = 29.71% p.a.

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