Certified Treasury Professional Practice Exam 2025 - Free CTP Practice Questions and Study Guide

To understand the effective cost of the discount offered in the payment terms of 3/5, net 30, we first need to break down what these terms mean. A 3/5 discount means that the buyer can take a 3% discount if the invoice is paid within 5 days; otherwise, the full amount is due in 30 days.

To calculate the effective cost of this discount, we have to look at the period in which the buyer could pay and the benefit they would receive from taking the discount. If the full payment terms are taken seriously, the time period from day 5 (when the discount is applicable) to day 30 (when the payment is due) is 25 days.

Here’s how to calculate the effective cost of the discount:

1. **Discount Amount**: If the total invoice is $100, the discount offered is 3%, or $3. So, the amount payable if the discount is taken is $97.

2. **Gain from Discount**: By paying $97 instead of $100, the business saves $3.

3. **Cost of Not Taking the Discount**: Not taking the discount means you would keep the cash for an additional 25 days before making the