Question

(Cost of Trade Credit) Calculate the effective cost of the following trade credit terms
where payment is made on the net due date.
a. 3/10, net 30
b. 2/15, net 45
c. 3/15, net 60
d. 3/15, net 60

Answer 1

Solution:

Calculation of effective cost of the following trade credit terms where payment is made on the net due date.

The trade credit term of for example 3/10, net 30, means that a 3% discount will be given if payment is made within 10 days. While the total amount is due in 30 days. Payment made after 10^th day and before 30^th day, and then other party have to pay a penalty of 2%. The penalty is for delayed payment from 10^th to 30^th day. Delay period is of 20 days.

So, if given term is 3/10, net 30,

Discount % = 3 %

Final due date = 30 days

Discount period = 10 days

Delay period = 20 days

Note: Total number of days in a year is taken as 360.

Formula used:

Effective cost of trade credit

= [Discount % / (100% - Discount %] X [Total number of days in year / (Final due date- Discount period)]

(a) 3/10, net 30

= [3% / (100 % - 3 %] X [360 / (30 – 10 days)]

= [3% / 97%] X [360 / 20]

= 3.093 % X 18

= 55.67 %

b. 2/15, net 45

= [2% / (100 % - 2 %] X [360 / (45 – 15 days)]

= [2% / 98%] X [360 / 30]

= 2.041 % X 12

= 24.49 %

c. 3/15, net 60

= [3% / (100 % - 3 %] X [360 / (60– 15 days)]

= [3% / 97%] X [360 / 45]

= 3.093 % X 8

=24.74 %

d. 3/15, net 60

= [3% / (100 % - 3 %] X [360 / (60– 15 days)]

= [3% / 97%] X [360 / 45]

= 3.093 % X 8

=24.74 %

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