- CFA Exams
- CFA Level I Exam
- Study Session 11. Corporate Finance (2)
- Reading 35. Working Capital Management
- Subject 4. Evaluating Accounts Receivable, Inventory and Accounts Payable Management

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**CFA Practice Question**

Your company purchased $10,000 worth of inventory on January 2nd on credit. The terms of the sale are 3/15 net 45. What is the effective annual interest rate if you pay the full amount in 35 days?

A. 28%

B. 37.6%

C. 74.3%

**Explanation:**(1 + 0.03/0.97)

^{(365/20)}-1 = 0.7435

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**User Contributed Comments**
9

User |
Comment |
---|---|

s16liu |
where does the 20 days come from? |

malawyer |
you paid 20 days after you could have paid with the discount (35 - 15 = 20) |

staudinger |
where does the 0.97 come from? 1 - 0.03? |

Allen88 |
I guess, one way to look at it is like this: the real cost is actually $97,000. The $3,000 is interest that the supplier earns if you don't pay back in 15 days. So they are making $3,000 on $97,000. I think this explains the .03/.97 in the equation. |

Profache |
Effective Interest Rate = (1+(Discount/1-Discount)^(365/days after discount period) |

najat |
Good question, got it wrong, I used 35 days instead of 20... |

thecfaguy |
Any one knows how the discount is being calculated here ? Just confused as to how they have arrived at 0.03 (3%). |

soukhov |
its from the terms of the sale |

dan1987 |
3 = Discount 15 = Discount period 45 = Period in which whole payment must be received |