Pets store inc sells on terms of 1/15 net 85 what is the effective annyal cost of trade credit under these terms

The cost of trade credit is the cost that someone will incur had he not taken the discount offered. This is calculated through the equation,

cost of trade credit = (1 + d / (1 - d)) ^ (365 / (Normal days - discount days)) - 1

From the given above it is identified that:

d = discount = 2% = 0.02

normal days = 85

discount days = 15

Substituting,

cost of trade credit = (1 + 0.02 / (1 - 0.02)) ^ (365 / (85 - 15)) - 1

= 0.111

Converting this to percentage will give us a final answer of 11.1%.