MoJo Corporation purchases goods on credit with terms of 4.5/15, net 40. Which of the following is the annual cost (APR) of the non-free trade credit if the firm pays on Day 40 (i.e., the cost of forgoing the discount)? In your computations, assume there are 360 days in a year.

Question

Quizplus · Accepted Answer

The cost of forgoing the discount can be calculated using the following formula:
[(Discount % / (100 - Discount %)] x [360 / (Payable Period - Discount Period)]
[(4.5% / (100 - 4.5%)] x [360 / (40 - 15)]
[(4.5% / 95.5%)] x 12
0.0471 x 12
0.5652 or 56.52%
Therefore, the annual cost (APR) of the non-free trade credit if the firm pays on Day 40 is 56.52%, which is closest to option B (67.85%).

MoJo Corporation Purchases Goods on Credit with Terms of 4