Question

What are the nominal and effective costs of trade credit under the credit terms of 3/10, net 30? Assume a 365-day year. Do not round intermediate calculations. Round your answers to two decimal places.

Answer 1

Answer:

Nominal cost of trade credit = [Discount percentage / (100- Discount Percentage) ] * [ 365 Days / (Credit's Outstanding - Discount Period) ]

Nominal cost of trade credit = 3/97 * 365/30 - 10

Nominal cost of trade credit =  3/97 * 365/20

Nominal cost of trade credit = 0.030928 * 18.25

Nominal cost of trade credit = 0.564436

Nominal cost of trade credit = 56.44%

Effective cost of trade =  (1 + Periodic rate)^n - 1

Periodic rate = 0.03 / 0.97 = 0.3093

Periods/year = 365 / (30-10) = 18.25

Effective cost of trade = (1 + 0.3093)^18.25 - 1

Effective cost of trade = (1 .3093)^18.25 - 1

Effective cost of trade = 1.74354232297 - 1

Effective cost of trade = 0.74354232297

Effective cost of trade = 74.35%

Answer 2

Answer:

nominal cost of credit = 56.44% ;EAR = 74.35%

Explanation:

1.nominal cost of credit =

"(discount rate /1 - discount rate  )"  or part 1

multiply by "365/(days the credit is outstanding -discount days )" or part 2 .Thus ,nominal cost of credit= (0.03/1-0.03  )*(365 /30 -10)= part  1* part 2 = 0.030928*18.25=56.44%

2.EAR =[ (1 - "part 1 ") ^("part 2") ] - 1= [ (1+0.030928)^18.25 ] -1  =1.74348 -1 = 0.74348  or  74.348% or  74.35%