Question

​(Cost of trade credit​) Calculate the effective cost of the following trade credit terms when payment is made on the net due date. Use approximate​ cost-of-credit formula. Note​: Assume a​ 30-day month and​ 360-day year. a. 2​/5​, net 45 b. 3​/10​, net 30 c. 4​/10​, net 60 d. 2​/10​, net 60 a. When payment is made on the net due​ date, the APR of the credit terms of 2​/5​, net 45 is nothing​%. ​(Round to two decimal​ places.) b. When payment is made on the net due​ date, the APR of the credit terms of 3​/10​, net 30 is nothing​%. ​(Round to two decimal​ places.) c. When payment is made on the net due​ date, the APR of the credit terms of 4​/10​, net 60 is nothing​%. ​(Round to two decimal​ places.) d. When payment is made on the net due​ date, the APR of the credit terms of 2​/10​, net 60 is nothing​%. ​(Round to two decimal​ places.)

Answer 1

Calculate the effective cost of the following trade credit terms when payment is made on the net due date

cost of not taking discount rate means Effective cost of trade credit relates to the cost of not taking discounts offered by the suppliers. It is used to compare the effective cost of other sources of borrowing and compare to find out the more beneficial option. If we get borrowing with less rate than this rate. We can take discount. It is benefits to the company

The formula for cost of not taking discount rate

Cost of not taking discount rate = ( 365 / ( days for net due payment - days in discount period ) ) * ( discount rate / ( 100 - discount rate )

A. When payment is made on the net due​ date, the APR of the credit terms of 2​/5​, net 45 is   = 18.62%

APR of the credit terms = Cost of not taking discount rate

Cost of not taking discount rate = ( 365 / (45 - 5 ) ) * ( 2 / ( 100 - 2 )

Cost of not taking discount rate = 365 / 40 * 2 / 98

Cost of not taking discount rate = 9.125 * 0.0204 = 0.1862   = 18.62%

B. When payment is made on the net due​ date, the APR of the credit terms of 3​/10​, net 30 is    =    56.44%

Cost of not taking discount rate = ( 365 / (30 - 10 ) ) * ( 3 / ( 100 - 3 )

Cost of not taking discount rate = 365 / 20 * 3 / 97

Cost of not taking discount rate = 18.25 * 0.0309 = 0.5644   = 56.44%

C. When payment is made on the net due​ date, the APR of the credit terms of 4​/10​, net 60 is     = 30.42%

Cost of not taking discount rate = ( 365 / (60 - 10 ) ) * ( 4 / ( 100 - 4 )

Cost of not taking discount rate = 365 / 50 * 4 / 96

Cost of not taking discount rate = 7.3 * 0.04167 = 0.3042   = 30.42%

D. When payment is made on the net due​ date, the APR of the credit terms of 2​/10​, net 60 is    = 14.90%

Cost of not taking discount rate = ( 365 / (60 - 10 ) ) * ( 2 / ( 100 - 2 )

Cost of not taking discount rate = 365 / 50 * 2 / 98

Cost of not taking discount rate = 7.3 * 0.02040 = 0.1490   = 14.90%