The cost of not taking the discount on trade credit of 3/10, net 30 is equal to
A) 54.75%.
B) 55.67%.
C) 56.44%.
D) 36.50%

Question

Quizplus · Accepted Answer

The discount of 3% is offered for paying within 10 days, otherwise, the full amount is due in 30 days.
The effective annual interest rate for not taking the discount can be calculated using the following formula:

Effective Annual Interest Rate = [(1 + Discount %) / (1 - Discount %)]^(365 / Number of Days Credit is Extended) - 1

Plugging in the given values, we get:

Effective Annual Interest Rate = [(1 + 0.03) / (1 - 0.03)]^(365 / 20) - 1
= 1.562 - 1
= 0.562 or 56.2%

Therefore, the cost of not taking the discount is equal to the effective annual interest rate of 56.2%, which is option C.

The Cost of Not Taking the Discount on Trade Credit