When managing accounts payable, what is the primary benefit of taking advantage of early payment discounts such as '2/10, net 30'?
Correct Answer
B) Significant cost savings equivalent to high annual interest rates
Early payment discounts like 2/10, net 30 offer substantial savings equivalent to approximately 37% annual interest rate. This represents significant cost savings that exceed most investment returns.
Why This Is the Correct Answer
CORRECT_ANSWER - Early payment discounts like 2/10, net 30 provide extraordinary cost savings when calculated as an annual interest rate. The 2% discount for paying 20 days early (30-10=20) equates to approximately 37% annual return on investment. This return far exceeds typical investment opportunities and represents the primary financial benefit that makes these discounts so valuable for contractors to capture.
Why the Other Options Are Wrong
Option C: Improved vendor relationships only
Early payment discounts don't significantly reduce paperwork or administrative costs. You still process the same invoices and payments, just on an accelerated timeline. The primary benefit is financial savings.
Option D: Better cash flow management
While taking early payment discounts may improve vendor relationships, this is a secondary benefit, not the primary one. The main advantage is the substantial financial return, not relationship building.
Memory Technique
Remember '2-10-30-37': 2% discount, 10 days early, 30 days total, equals 37% annual return - this huge return makes cost savings the PRIMARY benefit.
Reference Hint
Look up 'Accounts Payable Management' and 'Early Payment Discounts' in business management or financial management chapters of contractor reference materials.
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?