A firm buys on terms of 3/15,net 45 days.It does not take the discount,and it generally pays after 65 days.What is the nominal annual cost of its non-free trade credit,based on a 365-day year?
A)22.58%
B)23.71%
C)24.89%
D)26.14%

Question

Quizplus · Accepted Answer

The nominal annual cost of non-free trade credit is the difference between the discount rate and the effective annual rate. The discount rate is 3%, and the effective annual rate is the rate that would make the present value of the payment at the end of 65 days equal to the present value of the payment at the end of 45 days. This rate can be calculated using the following formula:Effective annual rate = (1 - Discount rate) ^ (365 / (Days to payment - Days to discount)) - 1Plugging in the values, we get:Effective annual rate = (1 - 0.03) ^ (365 / (65 - 15)) - 1 = 0.2614Therefore, the nominal annual cost of non-free trade credit is 26.14%.

A Firm Buys on Terms of 3/15,net 45 Days