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1)What are the nominal and effective costs of trade credit under the credit terms of 1/20, net 30? Assume a 365-day year
1)What are the nominal and effective costs of trade credit under the credit terms of 1/20, net 30? Assume a 365-day year. Do not round intermediate calculations. Round your answers to two decimal places.
Nominal cost of trade credit: Answer %
Effective cost of trade credit: Answer %
2) A chain of appliance stores, APP Corporation, purchases inventory with a net price of $600,000 each day. The company purchases the inventory under the credit terms of 1/15, net 35. APP always takes the discount but takes the full 15 days to pay its bills. What is the average accounts payable for APP? Round your answer to the nearest dollar.
Expert Solution
1). Computation of the nominal cost of trade credit:-
Nominal cost of trade credit = (Discount / (1 - Discount))*(365/(Days credit outstanding - Discount period))
= (1%/(1-1%))*(365/(30-20))
= 1.0101% * 36.50
= 36.87%
Computation of the effective cost of trade credit:-
Effective cost of trade credit = (1+(Discount/1-Discount)))^(365/(Days credit outstanding-Discount period))- 1
= (1+(1%/(1-1%)))^(365/(30-20))-1
= (1.0101^36.50)-1
= 1.4432 - 1
= 44.32%
2). Computation of the average accounts payable:-
Average accounts payable = Net inventory per day * Discount period
= $600,000 * 15
= $9,000,000
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