Question

A large retailer obtains merchandise under the credit terms of 1/10, net 40, but routinely takes 55 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer's effective cost of trade credit? Assume 365 days in year for your calculations. Do not round intermediate calculations. Round your answer to two decimal places.

%

Answer 1

Credit terms is 1/10 net 40
It means 1% discount if paid within 10 days. Otherwise payment is required to be made in 40 days.
But Payment days for bills is 55 days and supplier also allows this, as he is important customer.
Formula for cost of trade credit
Discount % / (100-Discount%) * 365 / (Payment days - Discount days)
1/(100-1) * 365 / (55-10)
8.19%
So, Cost of trade credit is 8.19%.