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​/10​, net 30 b. 3​/15​, net 30 c. 3​/15​, net 45 d. 2​/15​, net 60 a. When payment is made on the net due​ date, the APR of the credit terms of 2​/10​, net 30 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​/15​, 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 3​/15​, net 45 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​/15​, net 60 is nothing​%. ​(Round to two decimal​ places.) Enter your answer in each of the answer boxes.

Answer 1

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Answer:

APR = [ Discount / (100 - Discount) ] x [ No. of time periods in a year / (Total credit period - discount period) ]

a) 2 / 10 net 30 means that 2% discount will be given if payment is made within 10 days, otherwise whole amount is payable within 30 days. Therefore, discount is 2%, discount period = 10 days and total credit period = 30 days.

APR = [ 2 / (100 - 2) ] x [ 360 / (30 - 10) ] = 0.3673 or 36.73%

b) Similarly, in this case -

Discount = 3%, Discount period = 15 days, Total credit period = 30 days

APR = [ 3 / (100 - 3) ] x [ 360 / (30 - 15) ] = 0.742268 or 74.23%

c) Discount = 3%, Discount period = 15 days, Total credit period = 45 days

APR = [ 3 / (100 - 3) ] x [ 360 / (45 - 15) ] = 0.3711 or 37.11%

d) Discount = 2%, Discount period = 15 days, Total credit period = 60 days

APR = [ 2 / (100 - 2) ] x [ 360 / (60 - 15) ] = 0.1633 or 16.33%