Question

Calculate the nominal annual cost of nonfree trade credit under each of the following terms. Assume that payment is made either on the due date or on the discount date. Assume 365 days in year for your calculations. Do not round intermediate calculations.

a. 1/15, net 25. Round your answer to two decimal places.

b. 2/10, net 50. Round your answer to two decimal places.

c. 3/10, net 55. Round your answer to two decimal places.

d. 2/10, net 55. Round your answer to two decimal places.

e. 2/15, net 45. Round your answer to two decimal places.

Answer 1

Case A:

Discount Rate = 1%
Discount Period = 15 days
Credit Period = 25 days

Nominal Annual Cost = [Discount Rate / (1 - Discount Rate)] * [365 / (Credit Period - Discount Period)]
Nominal Annual Cost = [0.01 / (1 - 0.01)] * [365 / (25 - 15)]
Nominal Annual Cost = (0.01 / 0.99) * [365 / 10]
Nominal Annual Cost = 0.010101 * 36.5000
Nominal Annual Cost = 0.3687 or 36.87%

Case B:

Discount Rate = 2%
Discount Period = 10 days
Credit Period = 50 days

Nominal Annual Cost = [Discount Rate / (1 - Discount Rate)] * [365 / (Credit Period - Discount Period)]
Nominal Annual Cost = [0.02 / (1 - 0.02)] * [365 / (50 - 10)]
Nominal Annual Cost = (0.02 / 0.98) * [365 / 40]
Nominal Annual Cost = 0.020408 * 9.1250
Nominal Annual Cost = 0.1862 or 18.62%

Case C:

Discount Rate = 3%
Discount Period = 10 days
Credit Period = 55 days

Nominal Annual Cost = [Discount Rate / (1 - Discount Rate)] * [365 / (Credit Period - Discount Period)]
Nominal Annual Cost = [0.03 / (1 - 0.03)] * [365 / (55 - 10)]
Nominal Annual Cost = (0.03 / 0.97) * [365 / 45]
Nominal Annual Cost = 0.030928 * 8.1111
Nominal Annual Cost = 0.2509 or 25.09%

Case D:

Discount Rate = 2%
Discount Period = 10 days
Credit Period = 55 days

Nominal Annual Cost = [Discount Rate / (1 - Discount Rate)] * [365 / (Credit Period - Discount Period)]
Nominal Annual Cost = [0.02 / (1 - 0.02)] * [365 / (55 - 10)]
Nominal Annual Cost = (0.02 / 0.98) * [365 / 45]
Nominal Annual Cost = 0.020408 * 8.1111
Nominal Annual Cost = 0.1655 or 16.55%

Case E:

Discount Rate = 2%
Discount Period = 15 days
Credit Period = 45 days

Nominal Annual Cost = [Discount Rate / (1 - Discount Rate)] * [365 / (Credit Period - Discount Period)]
Nominal Annual Cost = [0.02 / (1 - 0.02)] * [365 / (45 - 15)]
Nominal Annual Cost = (0.02 / 0.98) * [365 / 30]
Nominal Annual Cost = 0.020408 * 12.1667
Nominal Annual Cost = 0.2483 or 24.83%