Question

If a firm buys on trade credit terms of 1?/10?, net 60 and decides to forgo the trade credit discount and pay on the net? day, what is the annualized cost of forgoing the discount? (assume a? 365-day year)? The annualized cost of the trade credit terms of 1?/10?, net 60 is

Answer 1

Formula sheet

A1

B

C

D

E

F

G

H

I

J

K

L

M

2

3

Credit terms of 1/10, net 60 means customer will get discount of 1% if amount is paid within 10 days otherwise whole amount is payable at day 60.

4

Assuming purchase amount of $100.

5

Purchase amount

100

6

Amount of discount if paid within 10 days

=D5*1%

7

If customer is foregoing the discount, it means they are paying $1 as interest for additional period of 60-10 = 50 days.

8

9

Thus interest rate for 50 days is

=D6/D5

10

Compounding factor, m

=365/50

(As interest rate is compounded at 50 days)

11

12

Annual percentage rate, APR

=Interest Rate for 50 days*(365/50)

13

=D9*D10

=D9*D10

14

15

Hence the Annualized cost of credit term is

=D13

16

17