Your supplier offers terms of 1 /20 , net 45. What is the effective annual cost of trade credit if you choose to forgo the discount and pay on day 45 ? (Hint: Use a 365-day year). The effective annual cost is nothing %. (Rounded to two decimal places.)

a) effective rate 14.75%

Explanation:

We should determinate the rate using the following formula:

principal x rate x time = interest

The principal will be the net of discount 1 - 0.01 = 0.99

Then, time will be the exposure to interest: 45 days net - 20 days end of discount = 25 days over 365

interest 1% = 0.01

0.99 x rate x (45-20) / 365 = 0.01

rate = 0.01/0.99*365/25 = 0.1474 = 14.75%