Question

Which of the following will increase the annualized effective cost of missing the trade credit discount?

	a.	An increase in the net trade credit period
	b.	An increase in the discount percentage
	c.	A decrease in the discount period
	d.	A decrease in the invoice amount

Answer 1

The formula for Annualised discount is:

[discount percentage/(1 - discount percentage) ^(365/ Days credit outstanding - discount period)] - 1 * 100

So, an increase in the discount percentage discount will increase the annualised effective cost of missing the trade discount.

A decrease in discount will decrease the annualised effective cost. A decrease in the discount period will decrease the Annualised discount. An increase the net credit period( difference between the days credit outstanding - discount period) will also not increase the Annualised discount.

The correct option is option B.