Your firm purchases goods from its supplier on terms of 1/10,net 30.The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered is closest to:
A)16.8%.
B)44.6%.
C)20.1%.
D)13.0%.

Question

Quizplus · Accepted Answer

The terms 1/10,net 30 mean that if the firm pays within 10 days, it can take a 1% discount on the invoice. Otherwise, the full invoice amount is due within 30 days.

To calculate the effective annual cost, we need to use the formula:

Effective Annual Cost = (1 + Discount % / (1 - Discount %)) ^ (365 / (Term Days - Discount Days)) - 1

Plugging in the numbers, we get:

Effective Annual Cost = (1 + 0.01 / (1 - 0.01)) ^ (365 / (30 - 10)) - 1
Effective Annual Cost = 20.08%

So the effective annual cost to the firm if it chooses not to take the trade discount is 20.08%. Therefore, the best choice is C.

Your Firm Purchases Goods from Its Supplier on Terms of 1/10,net