Question

Firms usually offer their customers some form of trade credit. This allowance comes with certain terms of credit. These terms will affect the cost of the asset for both the buyer and the seller.

Consider the following case:

Green Moose Industries buys on terms of 4/15, net 45 from its principal supplier. If Green Moose receives an invoice for $1,889.99, then the true price of this invoice is (Question Part 1)  A. 1270.07 B. 1451.51 C. 1814.39 D. 2540.15 ?

The supplier is willing to extend credit that exhibits a nominal annual cost of (Question Part 2) A. 45.67% B.49.73 50.74 D 59.87? .

Suppose Green Moose doesn’t take the discount and instead chooses to pay its supplier five days' late—so that on average, Green Moose will pay its supplier on the 50th day after the date of sale. As a result, Green Moose can decrease its actual nominal cost of trade credit by (Question Part 3) A. 16.92% B. 19.46 C. 32.15 D.32.99 ? by paying late.

Answer 1

Question Part 1

The answer is option B

Workings:

A) Invoice value $1889.99 is the nominal value of the invoice it includes the total value if customer doesn't want to pay the amount in 15 days.

B) The true value of the Invoice will be the real value

Hence,

True Value will be,

Assuming customer will pay the due amount in 15 Days and avail the 4% Discount:

The value would be = $1889.99 - $1889.99*4%

=$1889.99-$75.5996

=$1814.39 (Rounded off).

Question Part 2

Nominal Annual cost of credit for supplier will be= (Discount% / 100- Discount)*100* (365 / Credit Period - Discount Days)

Data Given in question:

1) Discount%= 4

2) Credit Period= 45 Days

3) Dscount Days= 15 Days

Putting the data in the above formula,

=(4 / 100 - 4) *100 * (365 / 45 - 15)

=4.17*12.17

=50.74%

Part 3

The cost of trade credit if paid within 45 days is 50.74%

Now if the same payment is made within 50 days then the cost of trade credit would be as follows:

1) (4/100-4)*100*(365 / 50-15)

=43.38%

Decrease in cost of trade credit would be =(50.74-43.38)/43.38

=16.92% (Option A is correct)