Trade Credit The Thompson Corporation projects an increase in sales from $1 mill

Question

Trade Credit

The Thompson Corporation projects an increase in sales from $1 million to $3 million, but it 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 3/10, net 30, but it can delay payment for an additional 30 days - paying in 60 days and thus becoming 30 days past due - without a penalty because of its suppliers' currently have excess capacity. What is the effective, or equivalent, annual cost of the trade credit? Round your answers to two decimal places. Assume 365 days in year for your calculations. Do not round intermediate calculations.

Nominal cost is 22.58

I need help with the effective cost. It is not 20.13.

Explanation / Answer

Discount Rate = 3%
Discount Period = 10 days
Days to Pay = 60 days

Effective Cots of Credit = [1 + Discount Rate/(100%-Discount Rate)]^[365 / (Days to pay-Discount period)] - 1
Effective Cots of Credit = [1 + 0.03/(1-0.03)]^[365 / (60-10)] - 1
Effective Cots of Credit = [1 + 0.03/0.97]^[365 / 50] - 1
Effective Cots of Credit = 1.030928^7.3 - 1
Effective Cots of Credit = 1.2490 - 1
Effective Cots of Credit = 0.2490
Effective Cots of Credit = 24.90%

So, effective cost of trade credit is 24.90%

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