Certainly a detail that I did not focus on which appeared on the test...
Trade Credit
First, convention of terms.
2/10, net 45 -- you get a 2% discount in the first 10 days. After that, there is no discount. You have a total of 45 days to pay. 35 days are after the discount period.
1/5, net 15 -- you get a 1% discount in the first 5 days. After that, there is no discount. You have a total of 15 days to pay. 10 days are after the discount period.
Logically, you should either pay on the last day of the discount period or on the last day of the net period. To pay earlier in any of the two windows would mean you are sacrificing trade credit. Why give up money earlier than you have to.
Calculation:
The second you exit the discount period, the cost of trade credit pops! That first day outside of the window is the worst day to pay!
The implied cost of credit is:
[(1+(discount/1-discount))^(365/days beyond discount period)] -1
Assume that the terms of the discount are 3/15 net 60
On day 15, the rate is still 0 since you are in the window period.
On day 16 *SLAM* the cost pops
[(1+(.03/.97))^(365)] -1 = UNGODLY high percent.... don't even think about it.
In 10 days after discount
[(1+(.03/.97))^(365/10)] - 1 = 204% Yeah.. no going to do that either..
On the last day of payment.. net 60.. which is 45 days beyond the window...
[(1+(.03/.97))^(365/45)] - 1 = 28% It's not getting any better than that!
Trade Credit
First, convention of terms.
2/10, net 45 -- you get a 2% discount in the first 10 days. After that, there is no discount. You have a total of 45 days to pay. 35 days are after the discount period.
1/5, net 15 -- you get a 1% discount in the first 5 days. After that, there is no discount. You have a total of 15 days to pay. 10 days are after the discount period.
Logically, you should either pay on the last day of the discount period or on the last day of the net period. To pay earlier in any of the two windows would mean you are sacrificing trade credit. Why give up money earlier than you have to.
Calculation:
The second you exit the discount period, the cost of trade credit pops! That first day outside of the window is the worst day to pay!
The implied cost of credit is:
[(1+(discount/1-discount))^(365/days beyond discount period)] -1
Assume that the terms of the discount are 3/15 net 60
On day 15, the rate is still 0 since you are in the window period.
On day 16 *SLAM* the cost pops
[(1+(.03/.97))^(365)] -1 = UNGODLY high percent.... don't even think about it.
In 10 days after discount
[(1+(.03/.97))^(365/10)] - 1 = 204% Yeah.. no going to do that either..
On the last day of payment.. net 60.. which is 45 days beyond the window...
[(1+(.03/.97))^(365/45)] - 1 = 28% It's not getting any better than that!