Effective Cost of Trade Credit The D.J. Masson Corporation needs to raise $400,0

Question

Effective Cost of Trade Credit

The D.J. Masson Corporation needs to raise $400,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 2/10, 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 $400,000 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

Nominal cost = 2%/(100%-2%) x (365/90-10) = 9.31%
Effective Cost = (1+ 2%/(100%-2%)^(365/90-10) - 1 = 9.66%
Loan = $400,000
less : Discount Interest = $400,000 x 2% x 4 = $32,000
$368,000
effective annual interest rate of this trade credit Will calculated using excel rate function
NPer = 1
Present Value = $368,000
Future value = $400,000
PMT = 0
Rate = 8.696%

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