The Thompson Corporation projects an increase in sales from $1 million to $3 mil

Question

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.

I need help with the effective cost please

Explanation / Answer

Discount 3% Discount Period 10 Days Days Credit is outstanding 60 Days Nominal Cost/Rate=(Discount%/(100%-Discount%))*(365/(days credit is outstanding-Discount Period) Nominal Cost/Rate=(3%/(100%-3%))*(365/(60-10)) 22.58% Effective Cost/Rate=(1+(Discount%/(100%-Disccount%)))^(365/(days credit is outstanding-Discount Period))-1 Effective Cost/Rate=(1+(3%/(100%-3%)))^(365/(60-10))-1 24.90%

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