Cost of Trade Credit Calculate the effective cost of the fol

(Cost of Trade Credit) Calculate the effective cost of the following trade credit terms
where payment is made on the net due date.
a. 3/10, net 30
b. 2/15, net 45
c. 3/15, net 60
d. 3/15, net 60

Solution

Solution:

Calculation of effective cost of the following trade credit terms where payment is made on the net due date.

The trade credit term of for example 3/10, net 30, means that a 3% discount will be given if payment is made within 10 days. While the total amount is due in 30 days. Payment made after 10^th day and before 30^th day, and then other party have to pay a penalty of 2%. The penalty is for delayed payment from 10^th to 30^th day. Delay period is of 20 days.

So, if given term is 3/10, net 30,

Discount % = 3 %

Final due date = 30 days

Discount period = 10 days

Delay period = 20 days

Note: Total number of days in a year is taken as 360.

Formula used:

Effective cost of trade credit

= [Discount % / (100% - Discount %] X [Total number of days in year / (Final due date- Discount period)]

(a) 3/10, net 30

= [3% / (100 % - 3 %] X [360 / (30 – 10 days)]

= [3% / 97%] X [360 / 20]

= 3.093 % X 18

= 55.67 %

b. 2/15, net 45

= [2% / (100 % - 2 %] X [360 / (45 – 15 days)]

= [2% / 98%] X [360 / 30]

= 2.041 % X 12

= 24.49 %

c. 3/15, net 60

= [3% / (100 % - 3 %] X [360 / (60– 15 days)]

= [3% / 97%] X [360 / 45]

= 3.093 % X 8

=24.74 %

d. 3/15, net 60

= [3% / (100 % - 3 %] X [360 / (60– 15 days)]

= [3% / 97%] X [360 / 45]

= 3.093 % X 8

=24.74 %

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