If a firm buys on trade credit terms of 1/10, net 45 decides to forgo the trade credit discount and pay on the net day, what is the annualized cost of forgoing the discount (assume a 360-day year)?
The annualized cost of the trade credit terms of 1/10, net 45 is ?%. (round to two decimal places.)
the annualized cost of the trade credit terms of 5/10, net 75 is ___%
18%
To calculate the annualized cost of forgoing the trade credit discount, we need to understand the terms "1/10, net 45".
"1/10" means that the firm can receive a 1% discount if they pay within 10 days.
"Net 45" means that the firm has a total credit period of 45 days to pay the full amount.
To find the annualized cost of forgoing the discount, we can consider two scenarios:
1. Paying within the discount period (10 days):
In this case, the firm would save 1% on the total amount due.
2. Paying on the net day (45th day):
In this case, the firm would pay the full amount without any discount.
To calculate the annualized cost, we need to compare the difference between these two scenarios over a year. Assuming a 360-day year, we can use the following formula:
Annualized Cost = (Discount % / (1 - Discount %)) * (360 / (Credit period - Discount period))
Using the given information:
Discount % = 1% (0.01)
Credit period = 45 days
Discount period = 10 days
Plugging these values into the formula:
Annualized Cost = (0.01 / (1 - 0.01)) * (360 / (45 - 10))
= (0.01 / 0.99) * (360 / 35)
= 0.0101 * 10.2857
≈ 0.1039 or 10.39%
Therefore, the annualized cost of forgoing the trade credit discount is approximately 10.39% when the firm decides to pay on the net day instead of within the discount period.