Question

Problem 16-07
Cost of Trade Credit

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.

1. 1/15, net 25. Round your answer to two decimal places.
   %
   
2. 2/10, net 55. Round your answer to two decimal places.
   %
   
3. 3/10, net 55. Round your answer to two decimal places.
   %
   
4. 2/10, net 50. Round your answer to two decimal places.
   %
   
5. 2/15, net 40. Round your answer to two decimal places.
   %

Answer 1

a, For 1/15 net 25. This implies that customer will get 1% discount if he pays within 15 days and total due days are 25 days

Discount = 1%, Discount days = 15,, Due days = 25

t = Due days - discount days = 25 - 15 = 10 days

Let N = Nominal annual cost of non free trade credit

N = 0.368686 = 36.8686% = 36.87% (rounded to two decimal places)

Nominal Annual cost of non free trade credit = 36.87%

b. For 2/10 net 55. This implies that customer will get 2% discount if he pays withinn 10 days and total due days are 55 days

Discount = 2%, Discount days = 10,, Due days = 55

t = Due days - discount days = 55 - 10 = 45 days

Let N = Nominal annual cost of non free trade credit

N = 0.165532 = 16.5532% = 16.55% (rounded to two decimal places)

Nominal Annual cost of non free trade credit = 16.55%

c. For 3/10 net 55. This implies that customer will get 3% discount if he pays within 10 days and total due days are 55 days

Discount = 3%, Discount days = 10,, Due days = 55

t = Due days - discount days = 55 - 10 = 45 days

Let N = Nominal annual cost of non free trade credit

N = 0.250859 = 25.0859% = 25.09% (rounded to two decimal places)

Nominal Annual cost of non free trade credit = 25.09%

d. For 2/10 net 50. This implies that customer will get 2% discount if he pays within 10 days and total due days are 50 days

Discount = 2%, Discount days = 10,, Due days = 50

t = Due days - discount days = 50 - 10 = 40 days

Let N = Nominal annual cost of non free trade credit

N = 0.186224 = 18.6224% = 18.62% (rounded to two decimal places)

Nominal Annual cost of non free trade credit = 18.62%

e. For 2/15 net 40. This implies that customer will get 2% discount if he pays within 15 days and total due days are 40 days

Discount = 2%, Discount days = 15,, Due days = 40

t = Due days - discount days = 40 - 15 = 25 days

Let N = Nominal annual cost of non free trade credit

N = 0.297959 = 29.7959% = 29.80% (rounded to two decimal places)

Nominal Annual cost of non free trade credit = 29.80%%