Question

Purple Turtle Group buys on terms of 1.5/10, net 60 from its chief supplier.

Answer 1

Answer:

If Purple Turtle receives an invoice for $1,889.99, the true price of this invoice would be $1861.64. The right answer is b

The nominal annual cost of the trade credit extended by the supplier is 11.10%. The right answer is c

The effective annual rate of interest on trade credit is 11.64$

As a result, Purple Turtle can decrease its nominal cost of trade credit by 10.10 % by paying late

Explanation:

In order to calculate what would be the true price of this invoice if If Purple Turtle receives an invoice for $1,889.99 we would have to make the following caluculation:

True Price of invoice= Invoice amount-discount on invoice amount

True Price of invoice = 1,889.99 x (1 - 1.5%) = $1,861.64

The true price of this invoice would be  $1,861.64

To calculate The nominal annual cost of the trade credit extended by the supplier we would have to make the following calculation:

Annual Cost of Credit = Discount % / (1-Discount %) x (365 / (Full allowed payment days - Discount days))

Annual Cost of Credit= 1.5 / (100 - 1.5) x 365 / (60 - 10)

Annual Cost of Credit=11.10%

The nominal annual cost of the trade credit extended by the supplier is 11.10%

365/50=7.30 periods where 50 days is a period in one year

Hence, interest rate per period=11.10/7.30=1.52

Therefore, effective annual rate of interest on trade credit=(1.0152)∧7.30-1=11.64%

The effective annual rate of interest on trade credit is 11.64%

The nominal annual cost if Purple Turtle does not take advantage of the discount= Discount % / (1-Discount %) x (365 / (Full allowed payment days - Discount days))

nominal annual cost if Purple Turtle does not take advantage of the discount=1.5 / (100 - 1.5) x 365 / (65 - 10)

nominal annual cost if Purple Turtle does not take advantage of the discount=10.10%