Question

Cost of Trade Credit What are the nominal and effective costs of trade credit under the credit terms of 1/15, net 30? Assume a 365-day year. Do not round intermediate calculations. Round your answers to two decimal places.

Nominal cost of trade credit: %

Effective cost of trade credit: %

Answer 1

Nominal cost of trade credit is computed as shown below:

= 1 / (100 - 1) x Number of days in a year / (30 - 15)

= 1 / 99 x 365 / 15

= 24.58% Approximately

Effective cost of trade credit is computed as follows:

= [1 + 1 / (100 - 1) ] ^{Number of days in a year / (30 - 15)} - 1

= [ 1 + 1 / 99 ] ^{365 / 15} - 1

= 1.01010101 ^24.33333333 - 1

= 27.71% Approximately

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