A firm offers terms of 2/15, net 45. (Enter your answers as directed, but do not
ID: 2455217 • Letter: A
Question
A firm offers terms of 2/15, net 45. (Enter your answers as directed, but do not round intermediate calculations.)
Requirement 1:
What effective annual interest rate does the firm earn when a customer does not take the discount? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Effective annual interest rate
%
Requirement 2:
What effective annual interest rate does the firm earn if the discount is changed to 3 percent? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Effective annual interest rate
%
Requirement 3:
What effective annual interest rate does the firm earn if the credit period is increased to 65 days? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Effective annual interest rate
%
Requirement 4:
What effective annual interest rate does the firm earn if the discount period is increased to 20 days? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Effective annual interest rate
%
A firm offers terms of 2/15, net 45. (Enter your answers as directed, but do not round intermediate calculations.)
Explanation / Answer
1 Nominal cost of trade credit = [ Discount percentage / (100- Discount Percentage) ] x [ 365Days / (credit is Outstanding-Discount Period) Term 2/15, n45 Nominal Cost = 2/98*365/(45-15) = 24.83% Nominal Cost of credit = 24.83 EAR = (1 + periodic rate)^N – 1 Peridic rate =2/98=2.040 Periods per year=365/(45-15) =12.16 EAR = (1.0204)^12.16-1 27.83% So efferctive interest rate of credit = 27.83% 2 Term 3/15, n45 Nominal Cost = 3/97*365/(45-15) = 37.63% Nominal Cost of credit = 37.63% EAR = (1 + periodic rate)^N – 1 Peridic rate =3/97=3.092 Periods per year=365/(45-15) =12.16 EAR = (1.03092)^12.16-1 44.82% So efferctive interest rate of credit = 44.82% 3 Term 2/15, n65 Nominal Cost = 2/98*365/(65-15) = 14.90% Nominal Cost of credit = 14.9% EAR = (1 + periodic rate)^N – 1 Peridic rate =2/98=2.040 Periods per year=365/(65-15) =7.3 EAR = (1.02040)^7.3-1 15.88% So efferctive interest rate of credit = 15.88% 4 Term 2/20, n45 Nominal Cost = 2/98*365/(45-20) = 29.80% Nominal Cost of credit = 29.8% EAR = (1 + periodic rate)^N – 1 Peridic rate =2/98=2.040 Periods per year=365/(45-20) =14.6 EAR = (1.02040)^14.6-1 34.29% So efferctive interest rate of credit = 34.29%
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