Your company has been offered credit terms of 4/30,net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)
A)16.05%
B)16.90%
C)17.74%
D)18.63%
E)19.56%

Question

Quizplus · Accepted Answer

To calculate the nominal annual percentage cost of non-free trade credit, we can use the following formula:

Nominal Annual Percentage Cost = (Discount % / (1 - Discount %)) x (365 / (Term days - Discount days))

In this case, the discount percentage is 4% and the discount period is 30 days. The term period is 90 days. Therefore,

Nominal Annual Percentage Cost = (4 / (1 - 4)) x (365 / (90 - 30)) = 16.90%

Since the company will pay after 120 days, which is past the net 90-day payment deadline, it will not receive any discount. Therefore, the cost of credit will be equal to the nominal annual percentage cost of 16.90%. The answer is option B.

Your Company Has Been Offered Credit Terms of 4/30,net 90