Pets Store Inc sells on terms of 110 net 45 What is the effe

Pets Store Inc. sells on terms of 1/10, net 45. What is the effective annual cost of trade credit under these terms? Use a 365-day year

Solution

discount = 1%
discount period = 10 days
days of credit = 45
Nominal cost of Trade discount = Discount/(100 -discount) * 365/( days of credit - dicount period )
= 1%/(100-1%) * 365/( 45 - 10) = 1/99 * 365/35 = 0.10533 or 10.53%
Effective annual cost = (1 + Discount/(100 -discount) ^365/( days of credit - dicount period ) -1
= (1 + 0.01/0.99)^(365/(45 -10)) -1= 0.1105 or 11.05%%
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