The company you just started has been offered credit terms of 4/30, net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)

Question

Quizplus · Accepted Answer

The nominal annual percentage cost of the non-free trade credit can be calculated using the formula for the cost of not taking the discount and extending the payment beyond the discount period. The formula is: $$Cost = \left(\frac{Discount\%}{1 - Discount\%}\right) \times \left(\frac{365}{Days\ beyond\ discount\ period}\right)$$ Given the terms 4/30, net 90, and the company pays in 120 days, the discount is 4%, and the days beyond the discount period are 120 - 30 = 90 days. Plugging these values into the formula: $$Cost = \left(\frac{0.04}{1 - 0.04}\right) \times \left(\frac{365}{90}\right) = 0.041666667 \times 4.05555556 = 0.1690\ or\ 16.90\%$$

The Company You Just Started Has Been Offered Credit Terms