Question

In: Accounting

Explain the trade credit facility provided by some companies to their customers that allow them to...

Explain the trade credit facility provided by some companies to their customers that allow them to manage their day-to-day liquidity situation and calculate the opportunity cost of an invoice that specifies the following conditions, as shown below (a. – c.): a) conditions: 1.25/10, n/30. b) conditions: 1.25/10, n/60. c) conditions: 1.5/10, n/60

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Expert Solution

Trade credit facility is the credit facility provided within the trade, between supplier and the purchasers of the transaction. The trade credit facility usually provided in form of Discount offered 10% ,if payment is made within particular period.

Opportunity Cost: It is the cost of the forgone benefit over the selection of the other alternative.

The Cost of Credit in All conditions are as follow:

Situation Option Cost of Effective Interest Opportunity Cost
a) 1.25/10, n/30 22.78% 22.78
b) 1.25/10, n /60 9.11% 9.11
c) 1.5/10 , n/60 10.96% 10.96
Let Suppose the Sale Value is 100
As with discount only 98.75 shall be paid, over the period of 10 days.
Effective interest rate provided over a period is 22.78 actual over a period of 30 days.

Similar explanation for other situation also.  

ekkarill92 answered 1 year ago
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