Problem 16-7 Cost of Trade Credit Calculate the nominal annual cost of nonfree t
ID: 2717866 • Letter: P
Question
Problem 16-7
Cost of Trade Credit
Calculate the nominal annual cost of nonfree trade credit under each of the following terms. Assume payment is made either on the due date or on the discount date. Assume 365 days in year for your calculations. Do not round intermediate calculations.
1/15, net 25. Round your answer to two decimal places.
%
2/10, net 55. Round your answer to two decimal places.
%
3/10, net 50. Round your answer to two decimal places.
%
2/10, net 50. Round your answer to two decimal places.
%
2/15, net 45. Round your answer to two decimal places.
%
Explanation / Answer
Cost of Trade Credit = [1 + Discount / (1-Discount) ]365 / Days after Discount Period - 1
For, 1/15, net 25,
1% is the discount
15 is the discount date
25 is the due date
Cost of Trade Credit = [1 + (0.01/0.99)]365/(25-15) - 1
= [1 + (0.01/0.99)]365/10 - 1
= 1.010136.5 - 1
= 1.4432 - 1 = 0.4432 = 44.32%
For 2/10, net 55
Cost of Trade Credit = [1 + (0.02/0.98)]365/(55-10) - 1
= [1 + (0.02/0.98)]365/45 - 1
= 1.02048.11 - 1
= 1.1781 - 1 = 0.1781 = 17.81%
For 3/10, net 50
Cost of Trade Credit = [1 + (0.03/0.97)]365/(50-10) - 1
= [1 + (0.03/0.97)]365/40 - 1
= 1.03099.125 - 1
= 1.3204 - 1 = 0.3204 = 32.04%
For 2/10, net 50
Cost of Trade Credit = [1 + (0.02/0.98)]365/(50-10) - 1
= [1 + (0.02/0.98)]365/40 - 1
= 1.02049.125 - 1
= 1.2024 - 1 = 0.2024 = 20.24%
For 2/15, net 45
Cost of Trade Credit = [1 + (0.02/0.98)]365/(45-15) - 1
= [1 + (0.02/0.98)]365/30 - 1
= 1.020412.167 - 1
= 1.2786 - 1 = 0.2786 = 27.86%