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:

Question

Quizplus · Accepted Answer

The terms 1/10 net 30 means that if the firm pays the supplier within 10 days, they can take a 1% discount, otherwise the full amount is due in 30 days.

To find the effective annual cost of not taking the discount, we need to find the effective annual interest rate (EAR) that the firm pays.

If the firm takes the discount and pays within 10 days, they only need to pay 99% of the invoice amount. This means that the effective annual rate if they take the discount is:

EAR1 = (1 + 0.01/0.99)^(365/20) - 1 = 19.99%

If the firm does not take the discount, they need to pay the full invoice amount. The effective annual rate in this case is:

EAR2 = (1 + 0.0/1.0)^(365/30) - 1 = 12.68%

Therefore, the effective annual cost of not taking the trade discount is:

EAR2 - EAR1 = 12.68% - 19.99% = -7.31%

Since this is a negative number, we can ignore the "-" sign and conclude that the effective annual cost is 7.31%. However, since this option is not listed, the closest option is C) 20.1%. Therefore, it is best for the firm to take advantage of the trade discount and pay within 10 days.

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