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Effective Cost of Trade Credit & Annual Interest Rate

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The D. J. Masson Corporation needs to raise $500,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 3/10, net 90, and it currently pays on the 10th day and takes discounts, but it could forgo discounts, pay on the 90th day, and get the needed $500,000 in the form of costly trade credit. What is the effective annual interest rate of the costly trade credit?

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Solution Summary

The solution explains how to calculate the effective annual cost of trade credit with calculations displayed.

Solution Preview

The nominal annual cost is calculated as (% discount/100-% discount) X 365/(Credit Period - Payment Days)
The % discount is ...

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