When a material supplier offers terms of '2/10 net 30', which payment strategy provides the best financial advantage to the contractor?
Correct Answer
D) Pay within 10 days to earn the 2% discount
Taking the 2% discount for payment within 10 days is equivalent to earning approximately 36% annual interest (2% for 20 days early payment). This typically exceeds most borrowing costs and investment returns available to contractors.
Why This Is the Correct Answer
Taking the 2% discount for payment within 10 days provides an exceptional return on investment. The calculation shows this is equivalent to earning approximately 36% annual interest, which far exceeds typical borrowing costs or investment returns available to contractors. This discount rate is so high that it's almost always financially beneficial to take advantage of it, even if the contractor needs to borrow money to pay early.
Why the Other Options Are Wrong
Option B: Pay on day 30 to maximize cash flow
Negotiating for net 45 terms doesn't capture the immediate 2% savings available. Extended payment terms may help cash flow but cannot match the 36% annual return equivalent of taking the early payment discount.
Option C: Pay immediately upon receipt to build vendor relationships
While building vendor relationships is important, paying immediately provides no additional financial benefit beyond the 2% discount already available for 10-day payment. The relationship benefit doesn't justify giving up the 8-day cash flow advantage.
Memory Technique
Remember '2/10 net 30 = Take the 2!' - Early payment discounts almost always provide better returns than holding cash or typical investment options.
Reference Hint
Business and Finance chapter - Payment Terms and Cash Management section
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