The approximate effective cost (EC)of financing the discount price of trade credit under terms 2/10,net/30 using a 360 day year is:

Question

Quizplus · Accepted Answer

The effective cost (EC) of financing the discount price of trade credit can be calculated using the following formula:

EC = [(Discount %)/(100% - Discount %)] x [(360)/(Full credit period - Discount period)]

Here, Discount % = 2%, Full credit period = 30 days, and Discount period = 10 days. Substituting the values, we get:

EC = [(2)/(98)] x [(360)/(30-10)] = 0.0367 or 3.67%

Therefore, the approximate effective cost of financing the discount price of trade credit is 3.67%, which is closest to option C (36.7%).

The Approximate Effective Cost (EC)of Financing the Discount Price of Trade