Afton 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. 17.1% B. 21.28% C. 23.1% D. 23.45% The answer is D, and they give 45=(1+(2/98))^(365/35)-1. I don’t get this and how they got it. I understand that 2/10, net 45 means 2% discount if you pay in 10 days, and it’s due in 45 days if you don’t pay early. That’s all I get. -Richard
(1 + Discount/1-Discount)^(365/# of days with credit) -1 # of days 45-10 = 35
[1+ (.02/1-.02)]^(365/45-10) -1 = .23452
Does anyone remember if this question was tested in any of the CFA samples/mocks or did it come out of Schweser samples.
I think CFA mock 1 or 2