1) Computation of the free trade credit:-

 

Free trade credit = (Total credit purchases in a year / 365) * Number of days of free trade

= ($365,000 / 365) * 10

= $1,000*10

= $10,000

2) Computation of the average level of the company's costly trade credit:-

Costly trade credit = (Total credit purchases in a year / 365) * Number of days after discount

= ($365,000 / 365) * (30 -10)

= $1,000 * 20

= $20,000

 

3) Computation of the average level of the company's total trade credit:-

Total trade credit = (Total credit purchases in a year / 365) * Total number of days

= ($365,000 / 365) * 30

= $1,000 * 30

= $30,000

 

4) Computation of the nominal annual cost of the firm's costly trade credit:-

Nominal cost of trade credit = (Discount % / (1 - Discount %)) * (365 / (Number of days credit availed - Number of days of free trade)) 

= (2% / (1 - 2%)) * (365 / (30 - 10))

= 2.0408% * 18.25

= 37.24%

 

5) Computation of the effective annual cost of the firm's costly trade credit:-

Effective annual cost trade credit = (1+(Discount %/(1-Discount %)))^(365/(Number of days credit availed-Number of days of free trade))-1

= (1+(2%/(1-2%)))^(365/(30-10)) -1

= (1.02041^18.25) -1

= 1.4459 - 1

= 44.59%