Andrews Corporation buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days.What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)
A) 14.34%
B) 15.10%
C) 15.89%
D) 16.69%
E) 17.52%

Question

Quizplus · Accepted Answer

The effective annual percentage cost of non-free trade credit can be calculated using the following formula:

Effective Annual Percentage Cost = [(Discount %) / (1 - Discount %)] x [365 / (Days credit is taken - Discount period)]

Where,
Discount % = 2%
Days credit is taken = 45 days
Discount period = 8 days

Substituting the values in the formula, we get:

Effective Annual Percentage Cost = [(2%) / (1 - 2%)] x [365 / (45 - 8)]
= 0.0204 x 10.1096
= 0.2064 or 20.64%

However, since Andrews Corporation does not take discounts, we need to calculate the effective annual percentage cost without considering the discount. In this case, the effective annual percentage cost can be calculated using the following formula:

Effective Annual Percentage Cost = [(Discount %) / (1 - Discount %)] x [365 / (Days credit is taken - Discount period + Discount period x (Discount %))]

Substituting the values in the formula, we get:

Effective Annual Percentage Cost = [(2%) / (1 - 2%)] x [365 / (45 - 8 + 8 x 2%)]
= 0.0204 x 9.76
= 0.1991 or 19.91%

Therefore, the effective annual percentage cost of Andrews Corporation's non-free trade credit is 19.91%. The best choice is C.

Andrews Corporation Buys on Terms of 2/8, Net 45 Days