Question

Purple Turtle Group buys on terms of 1.5/10, net 60 from its chief supplier.

If Purple Turtle receives an invoice for $1,889.99, what would be the true price of this invoice?


a) $1,954.72 b) $1,861.64 c) $2,327.05 d) $1,303.15


The nominal annual cost of the trade credit extended by the supplier is:


a) 13.10% b) 13.76% c) 11.10% d) 11.54%


The effective annual rate of interest on trade credit is ______.

Suppose Purple Turtle does not take advantage of the discount and then chooses to pay its supplier late, so that on average, Purple Turtle will pay its supplier on the 65th day after the sale.

As a result, Purple Turtle can decrease its nominal cost of trade credit by _____% by paying late.

Answer 1

If Purple Turtle receives an invoice for $1,889.99, the true price of this invoice would be $1861.64. The right answer is b

The nominal annual cost of the trade credit extended by the supplier is 11.10%. The right answer is c

The effective annual rate of interest on trade credit is 11.64$

As a result, Purple Turtle can decrease its nominal cost of trade credit by 10.10 % by paying late

Step-by-step explanation:

In order to calculate what would be the true price of this invoice if If Purple Turtle receives an invoice for $1,889.99 we would have to make the following caluculation:

True Price of invoice= Invoice amount-discount on invoice amount

True Price of invoice = 1,889.99 x (1 - 1.5%) = $1,861.64

The true price of this invoice would be $1,861.64

To calculate The nominal annual cost of the trade credit extended by the supplier we would have to make the following calculation:

Annual Cost of Credit = Discount % / (1-Discount %) x (365 / (Full allowed payment days - Discount days))

Annual Cost of Credit= 1.5 / (100 - 1.5) x 365 / (60 - 10)

Annual Cost of Credit=11.10%

The nominal annual cost of the trade credit extended by the supplier is 11.10%

365/50=7.30 periods where 50 days is a period in one year

Hence, interest rate per period=11.10/7.30=1.52

Therefore, effective annual rate of interest on trade credit=(1.0152)∧7.30-1=11.64%

The effective annual rate of interest on trade credit is 11.64%

The nominal annual cost if Purple Turtle does not take advantage of the discount= Discount % / (1-Discount %) x (365 / (Full allowed payment days - Discount days))

nominal annual cost if Purple Turtle does not take advantage of the discount=1.5 / (100 - 1.5) x 365 / (65 - 10)

nominal annual cost if Purple Turtle does not take advantage of the discount=10.10%