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a. ABC Inc purchases merchandise from a company that gives sites terms of 2/15 net 40days. ABC has gross purchases of GHS 819,388 per year. What is the maximum amount of costly trade credit ABC could get, assuming it abides by the supplier's credit terms? (Assume a 365- day year)
b. A firm is offered trade credit terms of 2/8, net 45 days. The firm does not take the discount, and it pays after 58days. What is the effective annual cost of not taking this discount? (Assume a 365-day year)
Expert Solution
a.)
After discount Net purchases = 819,388 *(100% -2%)
= 803,000
Per day Purchase = 803,000 / 365
= 2200
Maximum amount of costly trade = 2200 * 40
= $88000
b.)
Effective annual percentage cost = (1 + 2%/(1-2%)) ^ 365 / (58 -8)- 1
= 15.89%
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