Howes Inc

Finance Oct 20, 2020

Howes Inc. purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)

Expert Solution

Computation of the effective annual percentage cost of its non free trade credit:-

Effective annual cost of its non free trade credit = (1 + (Discount / (1 - Discount))) ^ (365/(Days of credit - Discount period)) -1

= (1+(2%/(1-2%))) ^ (365/(50-15)) -1

= (1.02041 ^ 10.42857) -1

= 1.2345 - 1

= 23.45%

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