Problem 8-1 Cash Discount [LO1] Compute The Cost Of Not Taki

Problem 8 1 Cash discount LO1 Compute the cost of not taking the following

Problem 8-1 Cash discount [LO1] Compute the cost of not taking the following

Determine the cost of not taking specific cash discounts for different terms, using a 360-day year. Calculate the cost as a percentage, rounded to two decimal places, omitting the percent sign.

(a) 2/18, net 40.

(b) 2/18, net 65.

(c) 3/11, net 50.

(d) 4/19, net 120.

Paper For Above instruction

Calculating the cost of not taking a cash discount involves understanding the implied annual interest rate, based on the short-term credit terms offered by suppliers. The general formula to determine this cost is:

Cost of lost discount (%) = [(Discount % / (100 - Discount %))] * (360 / (Net period - Discount period))

Here, the discount percentage (if any), the discount period, and the net period are used to compute the annualized cost, assuming a 360-day year. Let's analyze each scenario in detail.

(a) 2/18, net 40

For terms of 2/18, net 40, the discount is 2%, and the discount period is 18 days. The net period is 40 days, so the difference is 22 days.

Applying the formula:

Cost = [(2 / (100 - 2))]  (360 / (40 - 18)) = (2 / 98)  (360 / 22) ≈ 0.02041 * 16.36 ≈ 0.3339 or 33.39%

Thus, the cost of not taking the discount is approximately 33.39.

(b) 2/18, net 65

Discount: 2%, discount period: 18 days, net period: 65 days, difference: 47 days.

Cost = (2 / 98)  (360 / 47) ≈ 0.02041  7.66 ≈ 0.1564 or 15.64%

The cost of lost discount here is approximately 15.64.

(c) 3/11, net 50

Discount: 3%, discount period: 11 days, net period: 50 days, difference: 39 days.

Cost = (3 / (100 - 3))  (360 / 39) = (3 / 97)  (360 / 39) ≈ 0.03093 * 9.23 ≈ 0.2857 or 28.57%

The approximate cost is 28.57.

(d) 4/19, net 120

Discount: 4%, discount period: 19 days, net period: 120 days, difference: 101 days.

Cost = (4 / 96)  (360 / 101) ≈ 0.04167  3.56 ≈ 0.1483 or 14.83%

The cost of not taking the discount is approximately 14.83.

References

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