Annual Cost Of Trade Credit

Cost of Trade Credit

Lexus Company has extended 900 of trade credit to a client on terms of "ii/10, net/thirty." The

client can either pay 900 × 98% = 882 at the cease of the 10 day discount menstruum, or wait for

the full thirty days and pay the full 900. By waiting the total 30 days, the customer effectively

borrows 882 for an additional xx days, paying 900 – 882 or eighteen in involvement.

With the above information, the credit cost of borrowing this money tin can be computed as

follows:

Cost of Credit

= [Percent Discount/(100 – Per centum of Disbelieve)] x [360/(credit period – discount period)]

= [2/(100-2)] x [(360/(30-10)]

= 2/98 x 360/xx

= 0.367347

As per this example, the annual pct cost of offering a "2/10, net/ thirty" trade disbelieve is

almost 36.7347%.

Annualizing The Credit Cost

The 20-mean solar day discount menses occurs xviii times per yr. Using this data, information technology is possible to

compute the effective annual charge per unit of interest on a 360-solar day year:

Effective Annual Credit Cost

= [one+ r/yard)m – 1

= [one + (.367347/eighteen)]18 – ane

= 0.438568

Annualized, the 36.73 percentage cost of interest amounts to a substantial 43.8568 percent.

Some examples of additional credit costs are illustrated below:

Credit terms

Discount Days Internet Percent E. Annualized Rate

i 10 twenty 36.36% 43.59%

ane x thirty 18.xviii% nineteen.88%

2 10 20 73.47% 106.96%

2 x 30 36.73% 44.12%

3 10 20 one1one.34% 199.38%

iii 10 30 55.67% 73.75%

Annual Cost Of Trade Credit,

Source: https://www.studocu.com/row/document/university-of-dhaka/fundamental-of-marketing/cost-of-trade-credit-xxxxx/10813196