Question

If a firm buys on trade credit terms of 5​/15​, net 75 and decides to forgo the trade credit discount and pay on the net​ day, what is the annualized cost of forgoing the discount​ (assume a​ 365-day year)?

Answer 1

There is a formula to calculate the annualized cost of forgoing the discount which is stated below :

Here is the step by step use of the formula-

1. Divide the discount percentage, 5% by (100%-5%), which equals 5.2632% .

2. Divide 365 by difference of full allowed payment days and discount days, that is (75-15), which equals 6.0833.

3. Multiply the result of 5.2632% with 6.0833. It equals 32.0178%.

Hence, the annualized cost of forgoing the discount is 32.0178%.