Question

Sybex Corp. sells its goods with terms of 4/10 EOM, net 30. What is the implicit cost of the trade credit? Round to 4 decimal places and represent percentage as a decimal.

Answer 1

Solution:

The formula for calculating the implicit Cost of Trade Credit is

= [ Discount rate / (1 – Discount rate ) ] * [ 365 / (Total payment Period – period for which discount has been offered) ]

As per the information given in the question we have

Discount rate = 4 % = 0.04   ; No. of days in a period = 365 days ;

Total payment Period = 30 days ; Period for which discount has been offered = 10 days

Total payment Period – period for which discount has been offered = 30 – 10 = 20 days

Applying the above values in the formula we have

= [ 0.04 / ( 1 – 0.04 ) ] * [ 365 / ( 30 – 10 ) ]

= [ 0.04 / 0.96 ] * [ 365 / 20 ]

= 0.041667 * 18.25

= 0.760417

= 0.7604 ( when rounded off to four decimal places )

= 76.04 %

Thus the Implicit cost of trade credit is = 0.7604