Pets Store Inc. sells on terms of 2/15, net 50. What is theeffective annual cost...

Pets Store Inc. sells on terms of 2/15, net 50. What is the effective annual cost of trade credit under these terms? Use a 365-day year.

Round the answer to two decimal places in percentage form. (Write the percentage sign in the "units" box)

Expert Solution

2/15 , net 50 . It means that if the bill is paid within 15 days, there is a 2 % discount. Otherwise, the total amount is due within 50 days.

periodic rate = 2 % / (100 % - 2%) = 2.041 %

periods / year= 365 / (50- 15 ) = 10.429

Effective Cost of trade credit = (1 +periodic rate)^ no. periods - 1

= [(1 +(0.02041)^10.249] - 1

= [(1.02041)^10.429] - 1

= 1.2346 - 1

= 0.2346 i.e 23.46 %

jeff jeffy answered 2 years ago

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