A firm is offered trade credit terms of 2/8,net 45 days.The firm does not take the discount,and it pays after 58 days.What is the effective annual cost of not taking this discount? (Assume a 365-day year.)

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The effective annual cost of not taking the discount can be calculated using the formula for the cost of not taking trade discounts: $$ \text{Cost} = \left( \frac{\text{Discount \%}}{100\% - \text{Discount \%}} \right) \times \left( \frac{365}{\text{Days past discount} - \text{Discount period}} \right) $$ Here, the discount is 2%, so the discount % = 2/100 = 0.02. The firm pays in 58 days but the discount period is 8 days, so the days past discount = 58 - 8 = 50 days. Plugging these values into the formula gives: $$ \text{Cost} = \left( \frac{0.02}{1 - 0.02} \right) \times \left( \frac{365}{50} \right) = \left( \frac{0.02}{0.98} \right) \times 7.3 \approx 0.02041 \times 7.3 \approx 0.14899 $$ or 14.899%, which rounds to 15.89%.

A Firm Is Offered Trade Credit Terms of 2/8,net 45