Book Depot Inc. sells on terms of 3/15, net 50. What is the implicit cost of trade credit under these terms? Use a 365-day year.
Round the answer to two decimal places in percentage form. (Write the percentage sign in the "units" box)
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 = 3 % = 0.03 ; No. of days in a period = 365 days ;
Total payment Period = 50 days ; Period for which discount has been offered = 15 days
Total payment Period – period for which discount has been offered = 50 – 15 = 35 days
Applying the above values in the formula we have
= [ 0.03 / ( 1 – 0.03 ) ] * [ 365 / ( 50 – 15 ) ]
= [ 0.03 / 0.97 ] * [ 365 / 35 ]
= 0.030928 * 10.428571
= 0.322535
= 32.2535
= 32.25 % ( when rounded off to two decimal places )
Thus the Implicit cost of trade credit is = 32.25 %
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