Holiday Lumber buys $8 million of materials (net of discounts) on terms of 3/5,

Question

Holiday Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 35; and it currently pays after 5 days and takes discounts. Holiday Lumber plans to expand, which will require additional financing. Assume 365 days in year for your calculations.

1. If Holiday Lumber decides to forgo discounts, how much additional credit could it obtain? Round your answer to the nearest cent.
$____________


2. What would be the nominal cost of that credit?

37.62%

3. What would be the effective cost of that credit? Round your answer to two decimal places.
_______________%

Explanation / Answer

1. If Holiday Lumber decides to forgo discounts, how much additional credit could it obtain? Round your answer to the nearest cent.

$8,000,000/365*(35-5) days = $657,534.25

2. What would be the nominal cost of that credit?

Nominal cost of trade credit = 3/97 * 365/30 = 37.63%

3. What would be the effective cost of that credit? Round your answer to two decimal places.

Effective cost of trade credit = (1 + 3/97)365/30 – 1 = 1.2240 – 1 = 11.54 %

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