Question

For each of the following financial situations, calculate the optimal cash discount percentage (each bullet is a separate answer, solve each bullet)

• Cash discount period = 5 days, credit period = 75 days, and annual cost of capital = 15%  

• Cash discount period = 10 days, credit period = 30 days, and annual cost of capital = 12%  

• Cash discount period = 10 days, credit posted = 45 days, and annual cost of capital = 18%  

• Cash discount period = 10 days, credit period = 30 days, and annual cost of capital = 22% 8.

If the annualized cost of trade credit is 7.37%, what is the net trade credit period? Assume a discount percentage of 1% for payments received on or before 20 days

A. 50 Days  

B. 70 days  

C. 30 days  

D. 40 days  

Answer 1

the optimal Cash discount percentage will be

                    = Cost of Capital % X ( Credit Period - Cash discount period)   /   365

Accordingly,

( 365 days convention presumed)

Cash discount period = 5 days, credit period = 75 days, and annual cost of capital = 15%

      = Cost of Capital % X ( Credit Period - Cash discount period)   /   365

        =    15 % X (    75   - 5   )   / 365

         = 2.88%

Cash discount period = 10 days, credit period = 30 days, and annual cost of capital = 12%

       =    12% X (    30 - 10 )   / 365

         = 0.66%

Cash discount period = 10 days, credit posted = 45 days, and annual cost of capital = 18%

=    18% X (    45 - 10 )   / 365

         = 1.23%

Cash discount period = 10 days, credit period = 30 days, and annual cost of capital = 22%

=    22% X (    30 - 10 )   / 365

         = 1.21%

excel formulas

..