Question

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

Answer 1

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%