Question

If your firm buys $1,000 worth of supplies on credit with terms 3/15 n60 and pays the bill on the 60thday after the purchase:

a. What is the approximate, or "nominal," cost of trade credit as an annual rate?
b. What is the exactcost of trade credit as an annual rate?

Answer 1

Answer:

Nominal Cost of Trade Credit = 25.09%

Exact Cost of Trade Credit  = 28.03%

Explanation:

given data

buys worth =  $1,000

terms = 3/15 n60

pays the bill = 60th day

to find out

Nominal Cost of Trade Credit and Exact Cost of Trade Credit

solution

we know here Discount % and time 60 day and discount period that is

Discount % = 3%

time for Payment = 60 days

and Discount Period = 15 days

so Nominal Cost of Trade Credit will be as

Nominal Cost of Trade Credit = Discount % ÷ (100 - Discount % ) × [ 365 ÷ (time for Payment - Discount Period) ]    ..................1

put here value we get

Nominal Cost of Trade Credit = $\frac{0.03}{1-0.03}$ × $\frac{365}{60-15}$

Nominal Cost of Trade Credit = 25.09%

and

Exact Cost of Trade Credit will be here as

Exact Cost of Trade Credit = (1+Discount % ÷ (100%-Discount %))^(365/(time for Payment - Discount Period) - 1    ..................2

put here value we get

Exact Cost of Trade Credit  = $(\frac{1+0.03}{1-0.03})^{\frac{365}{60-15}} - 1$

Exact Cost of Trade Credit  = 28.03%