##### What is the effective annual cost of trade credit?

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Pets Sore Inc. sells on terms of 1/10, net 75. What is the effective annual cost of trade credit under these terms? Use a 365-day year.

Oct 7th, 2015

Given - 1/10  net 75 and

365 days year to be considered

It means, take 1% discount and pay within 10 days or pay in full within 75 days

Solution

Step 1: 365/(75-10) = 5.615

Step 2: 1%/(100%-1%) = 0.0101

Step3: Effective annual rate = 5.615 * 0.0101 = 0.0567 = 5.67%

Please let me know if you need any clarification. I'm always happy to answer your questions. Kindly best this answer if it has helped you.
Oct 7th, 2015

Hi, thanks for the response. However, my professor came up with 5.81.

Oct 7th, 2015

Hi, I have rechecked the solution and to best of my knowledge with 365 days and 1/10 net 75 values the answer for effective annual rate is 5.67%.

The formula for the same is,

Effective interest rate = (Discount%/(1-Discount%)) * (365/(full payment days - discount days))

here -

discount % = 1%

full payment days = 75

discount days = 10

The answer comes at 5.67% only.

Oct 7th, 2015

no problem, I figured it out

Oct 7th, 2015

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Oct 7th, 2015
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Oct 7th, 2015
Oct 18th, 2017
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