Answer (D) is correct . Because these terms involve an annual interest cost of over 36%, a company would not offer them unless it desperately needed cash. Also, credit terms are typically somewhat standardized within an industry. Thus, if most companies in the industry offer similar terms, a firm will likely be forced to match the competition or lose market share.
Answer (A) is incorrect because If the company does not need cash, it would not offer cash discounts, regardless of its cost of capital, unless required to match competition.
Answer (B) is incorrect because The ability to borrow at a lower rate is a reason for not offering cash discounts.
Answer (C) is incorrect because The relationship between the cost of capital and the prime rate may not be relevant if the firm cannot borrow at the prime rate.
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