Q:trade credit interest calculation

[annexguy]

4Q- 72 Afton Inc. is offered trade credit terms of 2/10, net 45. Afton’s implicit cost of failing to take the discount and instead paying the account in 45 days is closest to:
A. 17.10%.
B. 21.28%.
C. 23.10%.
D. 23.45%.
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my best guess:
B it is like a loan during day11~45,if paid on day 45.I=2%,simple interest annualize: 2%*(365/35)=20.9%

 

[map1]

Actually, there is a formula for this:
[1+ Discount/(1-Discount)]^(365/# days beyond discount period) - 1
that is [1+0.02/0.98]^(365/(45-10)) - 1= 23.45%

 

[annexguy]

map1, tks!
I guess you already passed level 1, right?

 

[annexguy]

it is like a 35-day discount t-bill.

 

[map1]

Nope, i failed in December. I’ll take it in June. And I hate working capital formulas

 

[mib20]

Is the appropriate caclulation like a 35 day discount t-bill or the way map has described? I am leaning more towards the t-bill. When I solve for it I get 21.28% as the implicit interest rate.
N = 35/365 = .0959
PMT = 0
PV = 100-discount = 98
FV = 100
Solve for I = 21.28%
Map..where do you see the logic behind your formula as opposed to the discount t-bill method?

 

[map1]

The logic, if there is one, is in the formula listed in the CFAi text (working capital).

 

[saurya_s]

Can somebody explain how to read and interpret the credit terms?
Thanks
S