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Effective annual cost of the trade credit

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The Thompson Corporation projects an increase in sales from $1.5 million to $2 million, but it needs and additional $300,00 of current assets to support this expansion. Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable. Thompson purchases under terms of 2/10, net 30, but can delay payment for an additional 35 days-paying in 65 days and thus becoming 35 days past due-without a penalty because its suppliers currently have excess capacity. What is the effective, or equivalent, annual cost of the trade credit?

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Effective cost of trade credit = (1+ periodic interest ...

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The solution explains how to calculate the effective annual cost of the trade credit