Question

Firms usually offer their customers some form of trade credit. This allowance comes with certain terms of credit, which will affect the actual cost of asset being sold for the buyer and the seller.Consider this case:Purple Turtle Group buys most of its raw materials from a single supplier. This supplier sells to Purple Turtle on terms of 4/10, net 60. The cost per period of the trade credit extended to Purple Turtle, rounded to two decimal places, is:______

Answer 1

Answer:

Purple Turtle Group

The cost per period of the trade credit extended to Purple Turtle, rounded to two decimal places, is:______

30%

Explanation:

a) Data and Calculations:

Credit terms = 4/10, net 60

The credit terms imply that the customer allows Purple Turtle Group 4% if it pays within 10 days, and the maximum period of the credit is 60 days.

Computing the difference between discount period and credit period = 60 - 10 = 50 days

Dividing number of days in a year by the above difference = 360/50 = 7.2

7.2 will be used to annualized the discount rate below.

Computing the difference between discount rate and 100% = 96%

Therefore, interest rate offered to customers = 4%/96% = 0.0417

The effective interest rate = 7.2 * 0.0417 = 0.30 = 30%