Dixie Tours Inc. buys on terms of 2/15, net 30 days. It does not take discounts, and it typically pays 35 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual cost of its non-free trade credit? (Assume a 365-day year.)
A) 17.2%
B) 23.6%
C) 26.1%
D) 37.2%
E) 50.6%

Question

Quizplus · Accepted Answer

The nominal annual cost of non-free trade credit can be calculated using the formula: Cost = (Discount % / (1 - Discount %)) * (365 / (Payment Days - Discount Days)). Substituting the given values: Cost = (2% / (1 - 2%)) * (365 / (35 - 15)) = 0.0204 * 18.25 = 0.3723 or 37.2%.