What is the effective annual cost of trade credit?

Business & Finance
Tutor: None Selected Time limit: 1 Day

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

Thank you for the opportunity to help you with your question!

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%


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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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