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    Effective annual cost of trade credit

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    The Thompson corporation projects an increase in sales from $1.5 million to $2 milliion, but needs an additional $300,000 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 it 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 equvialent, annual cost of the trade credit?
    Please use the EAR formula and show your work.

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    Solution Preview

    The EAR is calculated by taking the periodic rate and compounding it using the compounding frequency
    EAR = (1+periodic ...

    Solution Summary

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