A firm offers terms of 1.4/10, net 30. What effective annual interest rate does

Question

A firm offers terms of 1.4/10, net 30.

What effective annual interest rate does the firm earn when a customer does not take the discount? (Use 365 days a year.Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What effective annual interest rate does the firm earn if the terms are changed to 2.4/10, net 30, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What effective annual interest rate does the firm earn if the terms are changed to 1.4/10, net 45, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What effective annual interest rate does the firm earn if the terms are changed to 1.4/15, net 30, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What effective annual interest rate does the firm earn when a customer does not take the discount? (Use 365 days a year.Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

a)The interest rate for the term of the discount is:
Interest rate = 0.014/(1-1.4%)
Interest rate = 0.014199

And the interest is for:
30 - 10 = 20 days
So, using the EAR equation, the effective annual interest rate is:
EAR = (1 + Periodic rate)m - 1
EAR = (1+0.014199)^(365/20) - 1
EAR = 29.34%

b)The interest rate for the term of the discount is:
Interest rate = 2.4%/(1-2.4%)
Interest rate = 0.02459

And the interest is for:
30 - 10 = 20 days
So, using the EAR equation, the effective annual interest rate is:
EAR = (1 + Periodic rate)m - 1
EAR = (1+0.02459)^(365/20) - 1
EAR = 55.79%

c)

The interest rate for the term of the discount is:
Interest rate = 0.014/(1-1.4%)
Interest rate = 0.014199

And the interest is for:
45 - 10 = 35 days
So, using the EAR equation, the effective annual interest rate is:
EAR = (1 + Periodic rate)m - 1
EAR = (1+0.014199)^(365/35) - 1
EAR = 15.84%

d)

The interest rate for the term of the discount is:
Interest rate = 0.014/(1-1.4%)
Interest rate = 0.014199

And the interest is for:
30 - 15 = 15 days
So, using the EAR equation, the effective annual interest rate is:
EAR = (1 + Periodic rate)m - 1
EAR = (1+0.014199)^(365/15) - 1
EAR = 40.93%

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