Durham Cement,Inc.buys on terms of 2/15,net 30 days.It does not take discounts,and it typically pays 60 days after the invoice date.Net purchases amount to $720,000 per year.What is the nominal annual cost of its non-free trade credit? (Assume a 365-day year.)

Question

Quizplus · Accepted Answer

To calculate the nominal annual cost of non-free trade credit, we need to use the formula:

Nominal annual cost = (Discount %/(1-Discount %)) x (365/(Days credit is taken - Discount period))

Here,
Discount % = 2%
Days credit is taken = 60 days
Discount period = 15 days

So, substituting the values, we get:

Nominal annual cost = (2/(1-2)) x (365/(60-15))
Nominal annual cost = (2/(-1)) x (365/45)
Nominal annual cost = -2 x 8.11

Note that the negative sign is because the company does not take discounts.

Nominal annual cost = -16.22%
Nominal annual cost = 16.22% (ignoring the negative sign)

Therefore, the nominal annual cost of non-free trade credit for Durham Cement, Inc. is 16.22%, which is closest to option B (16.55%).