Question

Firms usually offer their customers some form of trade credit. This allowance comes with certain terms of credit, which affect the cost of asset of sale for the buyer as well as the seller. Consider this case: Tasty Tuna Corporation buys on terms of 1/10, net 30 from its chief supplier. If Tasty Tuna receives an invoice for $856.75, what would be the true price of this invoice?

1. $848.18
2. $890.59
3. $720.95
4. $636.14
The nominal annual cost of the trade credit extended by the supplier is. Suppose Tasty Tuna does not take advantage of the discount and then chooses to pay its supplier late-so that on average,. On average, Tasty Tuna will pay its supplier on the 35th day after the sale. As a result, Tasty Tuna can decrease its nominal cost of trade credit by by__________ paying late.

Answer 1

A.) $848.18

3.69%

Step-by-step explanation:

Invoice amount = $856.75

Payment term of 1/20, net 30 implies that if payment is made within 20 days then the customer will get a 1% discount, with the maximum payment term being 30 days.

Therefore, True price equals :

Invoice amount × (1 - 1%)

$856.75 × (1 - 0.01)

$856.75 × 0.99

= $848.1825

NOMINAL COST OF TRADE CREDIT:

(discount/(1-discount))×(365)(total payperiod - discount period)

Nominal cost of trade credit extended by the supplier:

(0.01/(0.99)) × (365)/(30-10)

0.010101 × 18.25 = 0.1843

= 18.43%

Nominal cost of trade credit if Tasty Tuna chooses to pay later:

(0.01/(0.99)) × (365)/(35-10)

0.010101 × 18.25 = 0.1474

= 14.74%

(18.43 - 14.74)% = 3.69%