The D. J. Masson Corporation needs to raise $400,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 3/10, net 75, and it currently pays on the 10th day and takes discounts. However, it could forgo the discounts, pay on the 75th day, and thereby obtain the needed $400,000 in the form of costly trade credit. What is the effective annual interest rate of this trade credit

Question

Rosa Stout

Business

21 March, 08:33

The D. J. Masson Corporation needs to raise $400,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 3/10, net 75, and it currently pays on the 10th day and takes discounts. However, it could forgo the discounts, pay on the 75th day, and thereby obtain the needed $400,000 in the form of costly trade credit. What is the effective annual interest rate of this trade credit

+1

Answers (1)

Know the Answer?

Malakai Owens · Answer 1

67.44%

Explanation:

The computation of Annualized rate is shown below:-

Annualized rate = (Discount percentage : 100 - Discount percentage) * 365 : (credit period - discount period)

(3% : (100% - 75) * (365 : (75 - 10))

= (3% : 25) * (365 : (75 - 10))

= 12% * 5.62

= 67.44%

Therefore for computing the annualized rate we simply applied the above formula.