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    Trade credit - implicit interest rate

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    Trade Credit Rates - A firm currently offers terms of sale of 3/20, net 40. What effect will the following actions have on the implicit interest rate charged to customers that pass up the cash discount? State whether the implicit interest rate will increase or decrease.

    a) the terms are changed to 4/20, net 40
    b) the terms are changed to 3/30, net 40
    c) the terms are changed to 3/20, net 30

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    https://brainmass.com/business/interest-rates/trade-credit-implicit-interest-rate-20353

    Solution Preview

    See the attached file where the complete answer is given

    Effective annual cost of foregoing cash discounts =
    = [(1 + per period rate)^number of periods per year - 1] X 100

    terms of sale of 3/20, net 40
    Terms
    Dicount= 3%
    Discount period= 20 days
    Period after which the account becomes overdue= 40 days

    Assume the payment is for $100.00
    During the first 20 days you obtain a free ride on the seller's credit
    If you do not take the cash discount, in effect you are borrowing the difference between the total amount billed
    100.and the amount of the cash discount 3. which, of course is 97.

    Per period cost of loan
    = dollar cash discount/dollar amount of loan= 3./ 97. = 3.09%

    No of periods= 365 days/ (40days - 20days )= 18.25 periods

    Effective annual cost of foregoing cash discounts =
    = [(1 + ...

    Solution Summary

    The solution calculates the implicit interest rate charged to customers that pass up the cash discount for different credit terms.

    $2.19