Your company has been offered credit terms of 4/30, net 90 days. What will the nominal annual cost of trade credit be if you pay 100 days after the purchase? (Assume a 365-day year.)

Question

Quizplus · Accepted Answer

Using the formula for the cost of trade credit: 
[(discount % / (100 - discount %)] x [365/(payment days - discount period)]

We can calculate the cost of trade credit as:
[(4 / (100 - 4)] x [365/(100-30-4)]
= 0.0417 x 4.84
= 0.2020 or 20.20%

However, since we are paying 100 days after the purchase instead of the discount period of 30 days, we need to adjust the calculation by adding the cost of forgoing the discount:
[(100-30) / 100] x [365/(100-30)]
= 0.7 x 4.89
= 3.42%

Thus, the nominal annual cost of trade credit will be:
20.20% + 3.42%
= 23.62%

Rounding this to the nearest whole number gives us a cost of 24%, which is closest to choice B (21.73%).

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