Company X sells on a 1/20, net 90, basis. Customer Y buys goods with an invoice

Question

Company X sells on a 1/20, net 90, basis. Customer Y buys goods with an invoice of $4,500.

How much can company Y deduct from the bill if it pays on day 20?

How many extra days of credit can company Y receive if it passes up the cash discount?

What is the effective annual rate of interest if Y pays on the due date rather than day 20? (Use 365 days in a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

How much can company Y deduct from the bill if it pays on day 20?

Explanation / Answer

A credit term of 1/20, Net 90 means that if the amount is repaid within 20 days, 1% cash discount is available, bt otherwise entire amount should be paid within 90 days.

(a)

If payment is made on day 20, deduction = $4,500 x 1% = $45

(b)

If company passes on the discount, then number of credit days received = 90 - 20 = 70 extra days

(c)

Cost of credit = Discount %/(1-Discount %) x [365 /(Full Credit Term - Discount Period)]

=(1% / 99%) x [365 / (90 - 20)]

= 0.0527 Or 5.27%

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