Accounts Payable (accept or refuse discount)

X Co has been offered credit terms from its major supplier of 2/10, net 45. That is, a cash discount of 2% will be given if payment is made within ten days of the invoice, and payments must be made within 45 days of the invoice. The company has the choice of paying 98c per $1 on day 10 (to pay before day 10 would be unnecessary), or to invest the 98c for an additional 35 days and eventually pay the supplier $1 per $1. The decision as to whether the discount should be accepted depends on the opportunity cost of investing 98c for 35 days. What should the company do?

Suppose that X Co can invest cash to obtain an annual return of 25%, and that there is an invoice from the supplier for $1,000.

Refusing discount:
Payment to supplier $1000
Return from investing $980** between day 10 and day 45 =$980 x 35/365 x 25%= 23.5
Net cost = $976.5

accepting discount
Payment to supplier = $980

**Why does return from investing be based on $980 instead of $1000?
$1000 x 35/365 x 25%= $23.97