Question

Suppose the credit terms offered to your firm by its suppliers are 2/10, net 30 days. Your firm is not taking discounts, but is paying after 25 days instead of waiting until Day 30. You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%. But since your firm is neither taking discounts nor paying on the due date, what is the effective annual percentage cost of its non-free trade credit, using a 365-day year?

Answer 1

Given

Credit period = 30 Days

Discount rate = 2% if paid in within 10 days

Payment days = 25 Days

We know that

Effective Cost of Trade Credit =[ { 1+ Discount % / ( 100- Discount % ) }^365/( Payment days-Discount days)]-1

= [ {1+2/ ( 100-2)} ^ 365/ ( 25-10)]-1

= [ {1+2/98} ^ 365/15]-1

= [ 1+0.020408]^24.33333-1

= [ 1.020408]^24.33333-1

= 1.634929-1

=0.634929

Effective Annual percentage Cost of its non free credit is 63.4929%.

If you are having any doubt,please post a comment.

Thank you.please rate it.