Question

A firm offers credit terms of 3/10, net 35. What is the effective annual rate on the credit extended if a customer foregoes the discount on a $10,000 purchase? Assume that there are 365 days in one year. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit the % sign in your response. For example, an answer of 15.39% should be entered as 15.39.)

Answer 1

Answer:
Credit term = 3/10, net 35

Days = Normal term days – Discount term days
Days = 35 – 10
Days = 25 days

Cost of Trade Credit = (1 + Discount %/ (1 –Discount %))^ (365 / Days) – 1
Cost of Trade Credit = (1 + 0.03/ (1 – 0.03))^ (365/ 25) – 1
Cost of Trade Credit = (1+ 0.03/0.97)^ (365 / 25) – 1
Cost of Trade Credit = (1+ 0.030928)^ (365 / 25) – 1
Cost of Trade Credit = (1.030928)^ (365 / 25) – 1
Cost of Trade Credit = 1.5600 - 1
Cost of Trade Credit = 0.5600 or 56.00