Suppose the suppliers of your firm offered you credit terms of 2/10 net 30 days. Your firm is not taking discounts, but is paying after 25 days instead of waiting until Day 30. You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%. But since your firm is neither taking discounts nor paying on the due date, what is the effective annual percentage cost (not the nominal cost) of its costly trade credit, using a 365-day year

EFFECTIVE ANNUAL PERCENTAGE COST= 63.5%

Explanation:

24.33 has been calculated as follows:

365/25-10 = 24.33

.0204 has been calculated as follows:

2/100 - 2 (2 is the percentage of discount)= 0.0204

Effective Annual Rate = (1.0204)^24.33 - 1 = 63.45% Or 63.5%.

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