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In this question you will have to compute the effective annual cost of trade credit. Suppose...

In this question you will have to compute the effective annual cost of trade credit. Suppose a firm is offered the following the terms are 1.1/9 net 30. Find the annualized interest cost? (Note: As this is a somewhat tough question, it has been set to accept answers within 5% of the correct solution rather than the standard 1%). Express your answer as a percentage, for example 3.18% should be entered as 3.18 without the percentage sign.

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Answer #1

Annualised interest cost = 1.1%/ ( 1- 1.1%) * 365 / ( 30 -9)  

= .010879 * 17.38

= 18.91%

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