Question

A firm buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 85 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year? a. 16.13% b. 18.55% c. 17.58% d. 15.00% e. 13.22%

Answer 1

Answer:

  a. 16.13%

Step-by-step explanation:

By not taking the discount, the company pays ...

  1/(1 -0.03) -1 ≈ 3.0928%

for the use of the creditor's money for 85 -15 = 70 days.

This translates to an annual rate x according to the proportion ...

  3.0928%/70 = x/365

  x = (365/70)(3.0928%) ≈ 16.13%

The APR of the credit the company is using is about 16.13%.