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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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Solution Summary

The implicit interest rate charged to customers that pass up the cash discount is calculated.

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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.

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

terms of sale of 3/20, net 40
Terms
Discount= 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 ...

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