Question

Calculate the annualized cost of the trade credit terms of 3​/15 net 75 when payment is made on the net due date​ (assume a​ 365-day year).

The annualized cost of the trade credit terms is ___% (round to 2 decimal places)

Answer 1

Solution :

The formula for calculating the annualized cost of trade credit is

Annualized cost of trade credit = ( 1 + [Discount rate / (1 – Discount Rate )] ) ⁿ – 1

Where n= No. of days in a period / ( Total payment Period – period for which discount has been

offered)

As per the information given in the question we have

Discount rate = 3 % = 0.03   ; No. of days in a period = 365 days ;

Total payment Period = 75 days ; Period for which discount has been offered = 15 days

Total payment Period – period for which discount has been offered = 75 – 15 = 60 days

Applying the above values in the formula we have

= ( 1 + (0.03 / (1 – 0.03)) ^(365/60) - 1                            

= ( 1 + (0.03 / 0.97)) ^{( 6.083333 )}   - 1                                

= ( 1 + 0.030928 ) ^{( 6.083333 )}   - 1                                     

= ( 1.030928 ) ^{( 6.083333 )}   - 1

= 1.203573 – 1 = 0.203573

= 20.3573 %

= 20.36 % ( when rounded off to two decimal places )                    

Thus the Annualized cost of trade credit is = 20.36 %     

Note: ( 1.030928 ) ^{( 6.083333 )}   is calculated using the excel formula =POWER(Number,Power)

=POWER(1.030928,6.083333) = 1.203573