Question

. Suppose your firm buys $1,000 worth of supplies on credit with terms 3/15 n60. a. What does "3/15 n60" mean? b. If you pay the bill on the 14th day after the purchase, what is the cost of the trade credit you have used for the 14-day period? c. If you pay the bill on the 50th day after the purchase, what is the cost of the trade credit you have used for the 45-day period after the discount period ended?

Answer 1

a.Please see explanation.

b.0%

c.25.14%

Step-by-step explanation:

a. 3/15, n 60 means that if my firm pays within 15 days, it will get discount of 3%, otherwise it can pay within 60 days in full.

b. Since, the firm is paying within 14 days i.e. before the discount period of 15 days allowed by supplier,therefore the cost of trade credit in this case will be 0%.

c. annual percentage cost of non-free trade credit based on 365 days can be calculated using the below formula:

Discount %/(100%-Discount %)*(365/(Actual credit days – Discount days))

In this case:

Discount%=3%

Actual credit days=60

Discount days=15

Cost of non- free credit=3%/(100%-3%)*(365/(60-15)

=3%/97%*(365/45)

=0.031*8.11

=25.14%