Question

Newsome Inc. buys on terms of 4/10, net 45. It does not take the discount, and it generally pays after 60 days. What is the effective (not nominal) annual percentage cost of its non-free trade credit, based on a 365-day year?

Answer 1

28.19%

Step-by-step explanation:

Cost of trade credit = (1 + D/1-D)^(365/n) - 1

Cost of trade credit = (1 + 0.04/1-0.04)^(365/60) - 1

Cost of trade credit = (1 + 0.04/0.96)^(6.083) - 1

Cost of trade credit = (1.04167)^(6.083) - 1

Cost of trade credit = 1.28189526454 - 1

Cost of trade credit = 0.28189526454

Cost of trade credit = 28.19%