2/10 net 30

CFA Level I
#1

what is the formula for the benefit to paying early? or where can it be found in schweser notes?

#2

[1 + (Discount)/(1+discount)] ^ (365/days after)

#3

nickfaulkner Wrote: ------------------------------------------------------- > [1 + (Discount)/(1+discount)] ^ (365/days after) That’s the penalty for not paying early, no?

#4

lol, my bad here is an example The invoice amount is $10,000 and 2/10 net 30 accounting is in place. If paid within 10 days: $10,000 X 98% = $9,800 due with in 10 days If paid within 30 days: $10,000 is due Mary likes that she can receive a $200 value by paying her bill quickly.

#5

BTW, what page is this on? Or what section is this in?

#6

thanks Nick

#7

I found it on CFOwiki- I use that sometimes for the examples

#8

( 1-discount / discount ) ^ 365 / days past deadline Its in corporate finance, book 4. first half of the book somewhere its on a left page, sad i remember this.

#9

Matt, this is for penalty for not paying early…I made same mistake Also, the denominator should be (1-discount) so [1+ (Discount/(1-discount) )] ^…

#10

stupid me, the formula is 1 + ( discount / 1- discount ) ^ 365 / days past deadline so say you DIDNT get the discount, of 2/10 net 30 and u paid on the 25th day, that cost, in an annual yield you passed up is: [1 + ( 0.02 / .98 )] ^ 365/15 - 1 (** 15 because its 25-10) = 1.6344 - 1 = 0.6444 so that APR you gave up translated into a 64% return. This is why its ALWAYS advantageous to pay suppliers in the first 10 days. After 10 days, your cost goes up HUGE, then decreases to something less outrageous by day 30. Logically if someone said 2/10 net 20, and you didn’t pay them on day 10, you would never pay them on day 11, you would always wait until day 30 – or default like a broke loser.

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#11

i was looking at morning mock exam 78, there is a big disparity if you don’t subtract the discount for days beyond discount period