Assume that its trade credit terms are 2/10, net 60 and Mackenzie pays on day 35

Finance Aug 08, 2020

Assume that its trade credit terms are 2/10, net 60 and Mackenzie pays on day 35. Using a 365 day year, what is Mackenzie's Effective Annual Rate (EAR) cost of trade credit?

Expert Solution

Computation of EAR Cost of Trade Credit :

EAR Cost of Trade Credit = (1 + {N}/(100 -{N}))^(365/{DP}) - 1

= (1+{2%})/(100-{2%}))^(365/{60-10})-1

= (1+(2%/98%))^(365/50) - 1

= (1+2.04%)^(7.30) - 1

= 1.1589 - 1

EAR Cost of Trade Credit = 0.1589 or 15.89%

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