Question

Assume the credit terms offered to your firm by your suppliers are 2.8 ​/5​, Net 30 . Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30. The effective annual cost of the trade credit is ___%, rounded by three decimal places.

Answer 1

2.8/5, Net 30 means 2.8% discount will be given if payment made with 5 days otherwise ultimately payment have to settle within 30 days.

It means if we need to make payment for $100 and we make it within 5 days then we just have to pay $97.2 (100-2.8) otherwise complete $100 have to pay within 30 Days.

So there is difference of 25 Days (30Days-5Days)

Therefore the effective

%

I hope this clear your doubt.

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