Your supplier offers terms of 1.2/10, Net 45. What is the effective annual cost of trade...
Your supplier offers terms of 1.2/10, Net 45. What is the effective annual cost of trade credit if you choose to forgo the discount and pay on day
45?
Homework Answers
| Discount rate is = 1.2% and net days = 45 - 10 days = 35 Days | |||||
| It means if the payment is within discount period than net payment = $ 100 - $ 1.2 = $ 98.80 | |||||
| Interest for discount period for early payment of 35 days | ($ 100 / $ 98.80 ) - 1 | ||||
| Interest for discount period of 35 Days = | 1.01215 | -1 | |||
| Interest for discount period of 35 Days = | 0.01215 | (Not Rounded) | |||
| Effective Annual Interest = 0.01215 X 365/35 = | 0.1267 | ||||
| Effective Annual Interest (In percentage) = | 12.67% | ||||
| Answer = Effective Annual Cost = 12.67% | |||||
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