Question

Calculate the annualized cost of the trade credit terms of 1​/10​, net 60 when payment is made on the net due date​ (assume a​ 365-day year)

Answer 1

Discount Rate = 1.00%
Discount Period = 10 days
Credit Period = 60 days

Nominal Cost of Trade Credit = [Discount rate / (1 - Discount rate)] * [365 / (Credit Period - Discount Period)]
Nominal Cost of Trade Credit = [0.01 / (1 - 0.01)] * [365 / (60 - 10)]
Nominal Cost of Trade Credit = [0.01 / 0.99] * [365 / 50]
Nominal Cost of Trade Credit = 0.01010101 * 7.3000
Nominal Cost of Trade Credit = 0.0737 or 7.37%

So, the annualized cost of trade credit is 7.37%