Lagos Retail Plc is offered credit terms of 2/10 net 60 by its supplier. The company's cost of short-term borrowing is 24% per annum. Using a 365-day year, what is the approximate annualised cost of forgoing the early settlement discount, and what decision should the company make?

Question

Accepted Answer

Approximately 14.9%; take the discount because it is cheaper than borrowing.. Annualised cost of forgoing = [2 ÷ (100−2)] × [365 ÷ (60−10)] = (2/98) × (365/50) = 0.02041 × 7.30 ≈ 14.9%. Since 14.9% is below the 24% borrowing cost, it is cheaper for the company to borrow funds and pay within the 10-day discount period, thereby taking the discount. This reduces the effective co

Answer

A) Approximately 14.9%; take the discount because it is cheaper than borrowing.

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B) Approximately 14.9%; forgo the discount because it costs less than the borrowing rate.

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C) Approximately 29.8%; take the discount because the cost of forgoing exceeds the borrowing rate.

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D) Approximately 24.0%; the company is indifferent between taking and forgoing the discount.

Lagos Retail Plc is offered credit terms of 2/10 net 60 by its supplier. The company's cost of short-term borrowing is 24% per annum. Using a 365-day year, what is the approximate annualised cost of forgoing the early settlement discount, and what decision should the company make?

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