- 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**

If credit terms of "1/10, net 35" are offered, the approximate cost (using 365 days) of not taking the discount and paying at the end of the credit period would be ______.

A. 10.0%

B. 11.05%

C. 15.8%

**Explanation:**(1 + 0.01/0.99)

^{365/25}- 1 = 15.8%

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**User Contributed Comments**
7

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

mpapwa22 |
Gosh, i got it right this time round....thank goodness. now can someone explain what it would be if you took the discount? |

JCopeland |
The effective rate you pay if you don't take the discount is 15.8% for the remainder of the payment period. If your company needs short term borrowings for liquidity and the rate which you can borrow is less than the discount, take the discount and borrow. If not, do not take the discount. |

ColonelCFA |
why am I getting 33%? Am I missing a step or are my order of operations off? |

c12mintz |
Net 35 vs net 25??? |

tichas |
@Colonel CFA . Its 1 added to 0.01/0.99 then finish the other part u will get your answer correctly |

cnoselli |
Where does the .99 come from? |

myron |
1% if paid within 10 days. |