Firms usually offer their customers some form of trade credit. This allowance comes with certain terms of credit, which affect the cost of asset of sale for the buyer as well as the seller.

Consider this case:

Cold Duck Manufacturing Inc. buys most of its raw materials from a single supplier. This supplier sells to Cold Duck on terms of 2/20, net 60.

The cost per period of the trade credit extended to Cold Duck, rounded to two decimal places, is 2.49%/2.20%/1.71%/2.04% .

Cold Ducks trade credit has a nominal annual cost of 15.45%/20.84%/23.08%/18.61% , assuming a 365-day year. (Note: Round all intermediate calculations to four decimal places, and your final answer to two decimal places.)

The effective annual rate (EAR) of the suppliers trade credit is 25.09%/16.79%/20.23%/21.85% .

If Cold Duck Manufacturing Inc.s supplier shortens its discount period to five days, this will decrease/increase the cost of the trade credit.