A firm buys on terms of 2/10, net 30, but generally does not pay until 40 days after the invoice date

Finance Dec 25, 2020

A firm buys on terms of 2/10, net 30, but generally does not pay until 40 days after the invoice date. Its purchases total P1,080,000 per year. What is the approximate cost of the “non-free” trade credit?

A. 21.9%

B. 24.5%

C. 16.2%

D. 19.4%

Expert Solution

Cost of trade credit = Discount% / (1-Discount%) * (360/(Days credit outstanding - Discount period)

= [2%/(1-2%)] * (360/(40-10)

= (0.02/0.98) * (360/30)

= 0.02040816326 * 12

= 0.24489795912

So, the cost of trade credit = 24.50%

Archived Solution

Unlocked Solution

You have full access to this solution. To save a copy with all formatting and attachments, use the button below.

Already a member? Sign In

Important Note: This solution is from our archive and has been purchased by others. Submitting it as-is may trigger plagiarism detection. Use it for reference only.

For ready-to-submit work, please order a fresh solution below.

Or get 100% fresh solution

Get Custom Quote