Your company has been offered credit terms of 4/30,net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 105 days after the purchase? (Assume a 365-day year. )

Question

Quizplus · Accepted Answer

The credit terms of 4/30, net 90 days mean that the company can take a 4% discount if it pays within 30 days, otherwise, the full amount is due in 90 days. 
To calculate the cost of non-free trade credit for paying after 105 days, we need to calculate the effective annual rate:
Effective annual rate = [(1 + (Discount/ (1- Discount))^(365/ (Days after discount - Discount period)) - 1)]

Here, the discount period is 30 days, and the days after discount period is 75 days (105-30).
So, the effective annual rate = [(1 + (0.04/ (1- 0.04))^(365/ (75)) - 1)] = 0.225 = 22.5%
Therefore, the nominal annual percentage cost of non-free trade credit for paying after 105 days is 20.28% (calculated by multiplying the effective annual rate by 75/365).
Hence, the correct answer is option C.

Your Company Has Been Offered Credit Terms of 4/30,net 90