Your company has been offered credit terms on its purchases of 3/15, net 30 days

Finance Sep 01, 2020

Your company has been offered credit terms on its purchases of 3/15, net 30 days. If you do not take the discount and pay after 50 days what is your company's effective annual cost (EFF%) of not taking the discount? What would be the effective annual cost if your company paid after 30 days? (Assume a 360-day year)

Expert Solution

Part a)
The effective time for credit = 50-15=35 days
Amount payable if discount availed = 97%
Amount paid after 50 days = 100%
Effective annual cost = (100%-97%)/97%*360/35=31.81%

Part b) If paid after 30 days
The effective time for credit = 30-15=15 days
Effective annual cost = (100%-97%)/97%*360/15=74.23%.

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