Freeman Builders, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Nominal interest rate refers to the interest rate before taking inflation into account. Nominal can also refer to the advertised or stated interest rate on a loan, without taking into account any fees or compounding of interest. The nominal interest rate formula can be calculated as: r = m × [ ( 1 + i)1/m - 1 ].

Where:

i=the effective rate

r=the stated rate

m=the number of compounding periods

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waidigbenro waidigbenro · Answer 2 · 2019-12-27T19:25:43+01:00

Answer:

Cost of not taking the discount = 16.55%

Step-by-step explanation:

The nominal annual percentage cost of non-free trade credit = Discount Percentage ÷ (1-Discount %) x [365/( Actual Days - Discount days)]

Where:

Discount Percentage = 2%

Discount Percentage ÷ (1-Discount %) = 2% / (1 - 0.02) = 2%/0.98 = 2.0408%

[365/( Actual Days - Discount days)] = 365/ (60 -15) = 365/45 = 8.111

Cost of not taking the discount = 2% ÷ (1-0.2) x [365/ (60 - 15)]

= 2.0408% x 8.111 = 16.55%