A firm offers its customers 1/10 net 40. What is the cost of trade credit to a customer who chooses to pay on day 40?
A)13.0%
B)12.8%
C)96.0%
D)65.5%

Question

Quizplus · Accepted Answer

The cost of trade credit can be calculated using the formula for the effective annual rate (EAR) when a discount is not taken. The discount offered is 1%, and the net period is 40 days, but the discount period is 10 days, leaving 30 days in which the full price must be paid. The formula for the EAR in this context is EAR = (1 + (Discount / (1 - Discount)))^(365/Days past discount) - 1. Plugging in the values, EAR = (1 + (0.01 / (1 - 0.01)))^(365/30) - 1 ≈ 0.130, or 13.0%.

A Firm Offers Its Customers 1/10 Net 40