A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 85 days. What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year

annual percentage cost is 10.05%

Explanation:

given data

time = 45 days

terms = 2/8

pay after A = 85 days

year y = 365 days

to find out

annual percentage cost

solution

we will calculate here effective annual percentage cost that is

annual percentage cost = ((1 + 2% / (1-2%)) ^y / (A-8) - 1 ... 1

put here all value

annual percentage cost = ((1 + 2% / (1-2%)) ^ (365 / (85-8)) - 1

annual percentage cost = (1+0.02 / 0.98) ^ (365/77) - 1

annual percentage cost = (1.020) ^ (365/77) - 1

annual percentage cost = 1.10050 - 1

so annual percentage cost is 10.05%