The D.J. Masson Corporation needs to raise $800,000 for 1 year to supply working

Question

The D.J. Masson Corporation needs to raise $800,000 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 discounts, pay on the 90th day, and get the needed $800,000 in the form of costly trade credit. What is the effective annual interest rate of this trade credit? Assume 365 days in year for your calculations. Do not round intermediate calculations. Round your answer to two decimal places.

Explanation / Answer

Massom buy currently at 3/10 , net 90 day from its suppliers

So, now total amount of discount on 3/10 basis is

=$ 800000*3÷100=$24000

So now discount of $24000 for 80 day period (90 day-10 day )

(90 day peries payment on net base and 10 day on payment on 3% discount base)

So total years interest amount is =$24000×365/80= $109500

So now total interest $109500 for one year on amount of $800000

So now final rate of Interest is =$109500/$80000*100= 13.69%

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