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%