### 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 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%

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 b

Explanation

There is NO cost of the trade credit . Firm is using FREE Trade Credit at this point.

Answer

No.

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