Question

Firms usually offer their customers some form of trade credit. This allowance comes with certain terms of credit, which affect the cost of asset of sale for the buyer as well as the seller.

Consider this case:

Tasty Tuna Corporation buys on terms of 2.5/15, net 60 from its chief supplier.

If Tasty Tuna receives an invoice for $1,545.78, what would be the true price of this invoice?

$1,356.43

$1,205.71

$1,130.36

$1,507.14

The nominal annual cost of the trade credit extended by the supplier is     . (Note: Assume there are 365 days in a year.)

The effective annual rate of interest on trade credit is     .

Suppose Tasty Tuna does not take advantage of the discount and then chooses to pay its supplier late—so that on average, Tasty Tuna will pay its supplier on the 65th day after the sale. As a result, Tasty Tuna can decrease its nominal cost of trade credit by     % by paying late.

Answer 1

If Tasty Tuna receives an invoice for $1,545.78, what would be the true price of this invoice?

$1,507.14

True Price of Invoice = Invoice price * (1 - Discount)

True Price of Invoice = 1545.78 * (1 - 2.50%)

True Price of Invoice = $1507.14

The nominal annual cost of the trade credit extended by the supplier is 20.80% . (Note: Assume there are 365 days in a year.)

Nominal Annual cost of trade = [Discount / (1 - Discount)] * 365 / (Total pay period - Discount Period)

Nominal Annual cost of trade = [2.50% / 97.50%] * 365 / (60 - 15)

Nominal Annual cost of trade = 20.80%

The effective annual rate of interest on trade credit is     .

Effective Annual cost of trade = [1 + (Discount / (1 - Discount))] ^ 365 / (Total pay period - Discount Period) - 1

Effective Annual cost of trade = [1 + (2.50% / 97.50%)] ^ (365 / (60 - 15)) - 1

Effective Annual cost of trade = 22.80%

Suppose Tasty Tuna does not take advantage of the discount and then chooses to pay its supplier late—so that on average, Tasty Tuna will pay its supplier on the 65th day after the sale. As a result, Tasty Tuna can decrease its nominal cost of trade credit by 2.08% % by paying late.

New Nominal annual cost trade = [Discount / (1 - Discount)] * 365 / (Total pay period - Discount Period)

New Nominal annual cost trade = [2.50% / 97.50%] * 365 / (65 - 15)

New Nominal annual cost trade = 18.72%

Change in Nominal annual cost of trade = 20.80%-18.72% = 2.08%