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A large retailer obtains merchandise under the credit terms of 1/15, net 45, but routinely takes 60 days to pay its bills Answer

A large retailer obtains merchandise under the credit terms of 1/15, net 45, but routinely takes 60 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer’s effective cost of trade credit?

Ans:

Effective cost of trade credit = (1 + 1/99) ^ 8.11 – 1.0

= 0.0849 = 8.492%.

 

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