Question

The calculated cost of trade credit for a firm that buys on terms of 2/10 net 30 is lower (other things held contant) if the firm plans to pay in 40 days than in 30 days.

True or False?

Answer 1

Answer:

Cost of Trade Credit = (1 + Discount%/ (100 – Discount%))^(365/ (Days to Pay –Discount period)) – 1

Cost of Trade Credit when Plans to pay in 30 days:

Cost of Trade Credit = (1 + 2/ (100 -2))^ (365 / (30 – 10)) – 1
Cost of Trade Credit = (1 + 2/98)^ (365 / 20) – 1
Cost of Trade Credit = 1.020408^ 18.25 – 1
Cost of Trade Credit = 1.445853 – 1
Cost of Trade Credit = 0.445853
or Cost of Trade Credit = 44.59%

Cost of Trade Credit when Plans to pay in 40 days:

Cost of Trade Credit = (1 + 2/ (100 -2))^ (365 / (40 – 10)) – 1
Cost of Trade Credit = (1 + 2/98)^ (365 / 30) – 1
Cost of Trade Credit = 1.020408^ 12.1667 – 1
Cost of Trade Credit = 1.278643 – 1
Cost of Trade Credit = 0.278643
or Cost of Trade Credit = 27.86%

False, the Calculated Cost of Trade Credit for a firm that buys on term of 2/10 net 30 is more than the firm that plans to pay in 40 days.