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14 February, 15:31

Your supplier offers terms of 1 /20 , net 45. What is the effective annual cost of trade credit if you choose to forgo the discount and pay on day 45 ? (Hint: Use a 365-day year). The effective annual cost is nothing %. (Rounded to two decimal places.)

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  1. 14 February, 18:02
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    a) effective rate 14.75%

    Explanation:

    We should determinate the rate using the following formula:

    principal x rate x time = interest

    The principal will be the net of discount 1 - 0.01 = 0.99

    Then, time will be the exposure to interest: 45 days net - 20 days end of discount = 25 days over 365

    interest 1% = 0.01

    0.99 x rate x (45-20) / 365 = 0.01

    rate = 0.01/0.99*365/25 = 0.1474 = 14.75%
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