Question

"TrainWorld buys on terms of 2.5/15, net 40. It does not take the discount and it generally pays after 40 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year

Answer 1

Answer:

The nominal annual percentage cost of its non-free trade credit, based on a 365-day year is 43.41%

Explanation:

Effective cost of trade credit

= (1 + Periodic rate)^Number of periods in a year - 1

= (1 + 0.025)^(365/25)-1

= 43.41%

Therefore, The nominal annual percentage cost of its non-free trade credit, based on a 365-day year is 43.41%

Answer 2

Answer: The answer is 37.4%

Explanation:

Using the formula Effective cost = i/1 -I × Days in the year/ CP - DP

Where CP = credit period which is the number of days required for full payment, DP = Discount period which is the maximum number of days allowed the customer to pay in order to enjoy cash discount, i = Discount rate per cent

I = 2.5, Days in the year = 365 days, CP = 40 , DP = 15

Rate = 2.5÷100 = 0.025

0.025/1 - 0.025 × 365/40 - 15

=0.025/0.975 × 365/25

= 9.125/24.375

= 0.374 × 100

= 37.4%

Therefore the nominal annual percentage cost is 37.4%