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28-04-2020
Business

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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

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aquialaska aquialaska

29-04-2020

Answer:

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.

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