Question

(Trade credit discounts) Determine the effective annualized cost of forgoing the trade credit discount on the following terms: a. 1/6, net 40 b. 1/10, net 35 c. 2/7, net 45 d. 5/6, net 70 e. 3/9, net 80 f. 5/5, net 50

Answer 1

Effective annualized cost of forgoing trade discount = [Discount % / (100% − Discount %)] × [360 / (Final due date − Discount period)]

a. Effective annualized cost of forgoing trade discount = [1 / (100 - 1) × [360 / (40 - 6) = 0.1070 or 10.70%

b. Effective annualized cost of forgoing trade discount = [1 / (100 - 1) × [360 / (35 - 10) = 0.1455 or 14.55%

c. Effective annualized cost of forgoing trade discount = [2 / (100 - 2) × [360 / (45 - 7) = 0.1933 or 19.33%

d. Effective annualized cost of forgoing trade discount = [5 / (100 - 5) × [360 / (70 - 6) = 0.2961 or 29.61%

e. Effective annualized cost of forgoing trade discount = [3 / (100 - 3) × [360 / (80 - 9) = 0.1568 or 15.68%

f. Effective annualized cost of forgoing trade discount = [5 / (100 - 5) × [360 / (50 - 5) = 0.4211 or 42.11%