Suppose the credit terms offered to your firm by your suppliers are 2/10,net 30 days.Out of convenience,your firm is not taking discounts,but is paying after 25 days,instead of waiting until Day 30.You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%.But since your firm is not taking discounts and is paying on Day 25,what is the effective annual cost (NOT the nominal cost) of your firm's current practice,using a 365-day year?

Question

Quizplus · Accepted Answer

To calculate the effective annual cost of not taking the discount and paying on Day 25, we need to use the following formula:

Effective Annual Cost = [(1+ Discount %)/(1- Discount %)]^(365/Number of days paid early) - 1

Here, the discount percentage is 2%, and the number of days paid early is 5 (30-25).

Plugging in the values, we get:

Effective Annual Cost = [(1+ 0.02)/(1- 0.02)]^(365/5) - 1

= (1.02/0.98)^(73) - 1

= 1.635 - 1

= 0.635 or 63.5%

Therefore, the best choice is B.

Suppose the Credit Terms Offered to Your Firm by Your