Trade Credit

1. Which of the following terms of trade credit is more expensive?

a. A 3% cash discount if paid on the 15th day with bill due on the 45th day (3/15, net 45)

b. A 2% cash discount if paid on the 10th day with the bill due on the 30th day (2/10, net 30)

Equation

iTC = percentage discount X 360

100% minus percentage discount payment period minus discount period

a. iTC = 0.03 X 360

1 - 0.03 45 – 15

0.03 X 360
0.97 30

= .031 x 12

iTC = 37.2%

b. iTC = 0.02 X 360

1 - 0.02 30 – 10

0.02 X 360
0.98 20

= .020 x 18

iTC = 36%