Question The Thompson Corporation projects an increase in sales from $1.5 million to $2 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable. Thompson purchases under terms of 2/10, net 30, but it can delay payment for an additional 35 days—paying in 65 days and thus becoming 35 days past due—without a penalty because its suppliers currently have excess capacity. What is the effective, or equivalent, annual cost of the trade credit?

YRVEMM The Asker · Finance

The Thompson Corporation projects an increase in sales from $1.5 million
to $2 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longer
taking discounts, thus increasing accounts payable. Thompson purchases
under terms of 2/10, net 30, but it can delay payment for an additional
35 days—paying in 65 days and thus becoming 35 days past due—without
a penalty because its suppliers currently have excess capacity. What is the
effective, or equivalent, annual cost of the trade credit?

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Community Answer

ZKJSPZ

Step 1 IntroductionPayment term of 2/10, net 30 mean if payment is made within 10 days then the customer will get 2% discount. And maximum payment term is 30 days. Here the customer is a potential customer, so he makes payment in 65 days without anyStep 2 Calculation of Effective costCost of effective trade credit =1+Discount %(1-Discount %)365(full allowed days - discount days) - 1Cost of effective trade ... See the full answer