Question

Consider trade credit as an unsecured source of financing. Recall we talked about it during our very first webinar. In summary, trade credit arises spontaneously when the firm purchases some merchandise from a supplier and then receives an invoice with a cash discount for early payment.

In this exercise all I want from you is to create a financial model using excel studying various aspects of trade credit as a flexible source of short-term financing available to the firm.

In your MS Excel file discuss about the follwing:

the APR (effective cost) of the trade credit.  

The overall cost should also be discussed.  

Here are the assumptions related to the invoice:

The invoice balance is $450,000.

The terms of the invoice is 3/45, net 90.

Attach an Excel file with your financial model in it. At the minimum you should discuss and produce the two numbered items above. In addition you might want to investigate another aspect of trade credit as well. Please consider what else can be analyzed with your financial model.

Answer 1

Answer:-

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If the financial model, not only effective Annual Rate could be know but also could be utilised to understand the compounding effect in discounts or short term benefits.

Also,in trade credit, instead of discount, financial charges are to be paid 3% quarterly or 1% monthly looks reasonable but the financial model prepared here will help to understand the extra amount paid due to compound effect (in this example, which comes to 12.55% instead of 12%) could be known.