16-10 Effective Cost of Trade Credit The D. J. Masson Corporation needs to raise

Question

16-10 Effective Cost of Trade Credit

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. However, it could forgo the discounts, pay on the 90th day and thereby obtain the needed $500,000 in the form of costly trade credit. What is the effective annual interest rate of this trade credit?

The Answer is--14.91--show all work and formulas to support answers.

Explanation / Answer

Cost of trade credit:

= (1+D÷(1-D))^(365÷n)-1

D is discount rate

n is Number of days after discount period

= (1+3%÷(1-3%))^(365÷80)-1

= 14.91%

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