Question

A large retailer obtains merchandise under the credit terms of 3/10, net 30, but routinely takes 60 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer's effective cost of trade credit? Assume 365 days in year for your calculations. Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

• Effective Cost of Trade Credit
  = [1 + (Discount rate/100% - Discount rate)^{Periods per year}] – 1
• Working and Answer

A	Discount rate	3%
B	100% - Discount rate	97.00%
C	No. of days in a year	365
D	Credit days	30
E	Discount period	10
F = (D - E)	Remaining days	20
G = C/F	Periods per year	18.25
H = ((1+A/B)^G)-1	Effective Cost of Trade Credit	74.35% = Answer

= [1 + (0.03/0.97)^18.25] – 1
= 74.35% = Answer