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Determine the effective annualized costs of forrgoing the trade credit discount on the following terms A....

Determine the effective annualized costs of forrgoing the trade credit discount on the following terms A. 3/10 net 40 B. 2.20 net 40 4/20 net 60

Solutions

Expert Solution

Answer a.

Discount Rate = 3%
Discount Period = 10 days
Credit Period = 40 days

Effective Annual Rate = [1 + Discount Rate / (1 - Discount Rate)]^[365 / (Credit Period - Discount Period) - 1
Effective Annual Rate = [1 + 0.03 / (1 - 0.03)]^[365 / (40 - 10)] - 1
Effective Annual Rate = 1.03093^12.167 - 1
Effective Annual Rate = 1.4486 - 1
Effective Annual Rate = 0.4486
Effective Annual Rate = 44.86%

Answer b.

Discount Rate = 2%
Discount Period = 20 days
Credit Period = 40 days

Effective Annual Rate = [1 + Discount Rate / (1 - Discount Rate)]^[365 / (Credit Period - Discount Period) - 1
Effective Annual Rate = [1 + 0.02 / (1 - 0.02)]^[365 / (40 - 20)] - 1
Effective Annual Rate = 1.02041^18.250 - 1
Effective Annual Rate = 1.4459 - 1
Effective Annual Rate = 0.4459
Effective Annual Rate = 44.59%

Answer c.

Discount Rate = 4%
Discount Period = 20 days
Credit Period = 60 days

Effective Annual Rate = [1 + Discount Rate / (1 - Discount Rate)]^[365 / (Credit Period - Discount Period) - 1
Effective Annual Rate = [1 + 0.04 / (1 - 0.04)]^[365 / (60 - 20)] - 1
Effective Annual Rate = 1.04167^9.125 - 1
Effective Annual Rate = 1.4514 - 1
Effective Annual Rate = 0.4514
Effective Annual Rate = 45.14%

jeff jeffy answered 2 years ago
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