What would be the firm’s nominal and effective costs of not taking discounts if it could stretch its payments to 40 days?
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Suppose a firm makes purchases of $3.65 million per year under terms of 2/10, net 30, and takes discounts. Suppose a firm makes purchases of $3.65 million per year under terms of 2/10, net 30, and takes discounts. Suppose a firm makes purchases of $3.65 million per year under terms of 2/10, net 30, and takes discounts. Suppose a firm makes purchases of $3.65 million per year under terms of 2/10, net 30, and takes discounts. |
part a
swer
Answer : $100,000
Working :
Average amount of Accounts Payable = (Yearly Accounts Payable (Net of discount) / days in a year) * days till which discount available
=($3,650,000/365) * 10 days = $10,000 * 10 days = $100,000
part b
Explanation
There is NO cost of the trade credit . Firm is using FREE Trade Credit at this point.
Answer
No.
part c
Explanation
Average payables = 3,650,000 / 365 x 30 = $300,000
Nominal cost = (2 / 98) x (365/(30-10)) = 0.3724489796 = 37.24%
Effective cost = (1+(2/98))365/20 - 1 = 0.4458529273 = 44.59%
Answer
Answers
Average payables = $300,000
Nominal cost = 37.24%
Effective cost = 44.59%
part d
Explanation
discount percentage =2%
Days credit outstanding = 40 days
Discount period =10 days
Nominal annual cost of trade credit = Discount percentage/ (100-Discount percentage) *365/(Days credit is outstanding - Discount period)
Nominal cost of trade credit =2/98*365/(40-10)
=0.0204*12.17
=0.2483
=24.83%
in effective annual terms cost of trade credit =(1+periodic rate)^(period/year)-1
periodic rate = Discount percentage /(100-Discount percentage)
Period/year =365/(days credit is outstanding -Discount period)
Periodic rate =2/98 =0.0204
period/year =365/(40-10) =12.17
Effective cost of trade credit =(1.0204)^12.17-1.0
=0.2786
=12.86%
Answer
Nominal Rate = (2/98) * 365/(40-10) = 24.83%
Effective Cost = (1 + 2/98 ) 365/30 - 1 = 27.86%
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