Question

Cost of Trade Credit A large retailer obtains merchandise under the credit terms of 1/20, net 30, but routinely takes 65 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer's effective cost of trade credit? Assume a 365-day year. Do not round intermediate calculations. Round your answer to two decimal places. %

Answer 1

Credit Terms =  1/20, net 30

It means 1% discount if paid within 20 days of invoice, otherwise pay in 30 days of Invoice amount

Formula for:-

Discount = 1%

Days Taken = 65 days

Discount Period = 20 days

So, effective cost of trade credit is 8.19%

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