Question

Calculate the nominal annual cost of nonfree trade credit under each of the following terms. Assume that payment is made either on the discount date or on the due date. a. 1 10, net 20 b. 2 10, net 60 c. 3/10, net 45 d. 2/10, net 45 e. 2/10, net 40

Answer 1

Nominal annual cost of nonfree trade credit = [Discount / (1 - Discount)] x [365 / (Total credit days - Discount days)]

a) 1/10 net 20 means 1% discount will be given if amount is paid within 10 days, otherwise the whole amount is payable within 20 days.

Nominal annual cost of nonfree trade credit = [0.01 / (1 - 0.01)] x [365 / (20 - 10)] = 0.36868686 or 36.87%

b) 2/10 net 60 means 2% discount will be given if amount is paid within 10 days, otherwise the whole amount is payable within 60 days.

Nominal annual cost of nonfree trade credit = [0.02 / (1 - 0.02)] x [365 / (60 - 10)] = 0.14897959 or 14.90%

c) 3/10 net 45 means 3% discount will be given if amount is paid within 10 days, otherwise the whole amount is payable within 45 days.

Nominal annual cost of nonfree trade credit = [0.03 / (1 - 0.03)] x [365 / (45 - 10)] = 0.322533137 or 32.25%

d) 2/10 net 45 means 2% discount will be given if amount is paid within 10 days, otherwise the whole amount is payable within 45 days.

Nominal annual cost of nonfree trade credit = [0.02 / (1 - 0.02)] x [365 / (45 - 10)] = 0.212827988 or 21.28%

e) 2/10 net 40 means 2% discount will be given if amount is paid within 10 days, otherwise the whole amount is payable within 40 days.

Nominal annual cost of nonfree trade credit = [0.02 / (1 - 0.02)] x [365 / (40 - 10)] = 0.24829932 or 24.83%