Question

Compute the cost of not taking the following cash discounts. (Use a 360-day year. Do not round intermediate calculations. Input your final answers as a percent rounded to 2 decimal places.)

		Cost of Lost Discount
a.	2/12, net 55		%
b.	3/22, net 40		%
c.	3/16, net 50		%
d.	4/12, net 185		%

Answer 1

If Payment Terms is in the form of D/E, net N

Cost of Lost Discount = [D / (100 - D)] * [360 / (E - N)]

where, D = Cash Discount; E = Early Payment Date for availing Cash Discount; N = Normal Due Date

	D/E, net N	D	E	N	Cost of Lost Discount
a	2/12, net 55	2	12	55	17.09%
b	3/22, net 40	3	22	40	61.86%
c	3/16, net 50	3	16	50	32.75%
d	4/12, net 185	4	12	18	250.00%

Explination:

If amount is paid with in E Days, Discount of D%will be given,

Then, D is the Percent of Implied Return earned on amount (100-D), for (E-N) days.

Then Return for (E-N) Days will be D / (100 - D)

Hence, for 360 Days, Return will be [D / (100 - D)] * [360 / (E - N)]