A company is offered trade credit terms of 2/10, net 45. The implicit cost of failing to take the discount and instead paying the account in 45 days is closest to: a.21.28% b.23.10% c.23.45% Answer is C. I don’t really get the CFAI mock explanation for this one. can somebody clarify?? CFAI mock says the cost of trade credit if paid on day 45 = (1+2 /98)^365/65 - 1 = 23.45%
if you pay in 10 days. you pay only 98, if you pay later say in 45 days you pay 100. it is like a t bill. holding period yield = (100-98)/98, adjust to annual effective rate in your formula, there should be 35 instead of 65.
The days appear to be off in the explanation, it is ^365/35 (45 days - 10 days). Solution: 1.020408 ^ 10.428571 = 1.234522, subtract 1 and you’re left with .234522.
okok that makes sense. thanks to both
Frustrating…i went to google a few days ago to get this formula and i learned this… The formula is: Amount of discount/Discounted Price x Number of daysin the year/number of days paid early Begin by dividing 2/98 and then multiply it by the number of days in the year divided by the invoice was paid early (35 days). 2 divided by 98 = .020408 365 divided by 35 = 10.4 10.4 times .020408 = 21.28% which would have been A. Looks like CFAI uses a different formula…