A firm offers terms of 1.8/10, net 60. a. What effective annual interest rate do

Question

A firm offers terms of 1.8/10, net 60.

a. 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)) Effective annual interest rate %

b. What effective annual interest rate does the firm earn if the terms are changed to 2.8/10, net 60, 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)) Effective annual interest rate %

c. What effective annual interest rate does the firm earn if the terms are changed to 1.8/10, net 75, 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)) Effective annual interest rate %

d. What effective annual interest rate does the firm earn if the terms are changed to 1.8/15, net 60, 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)) Effective annual interest rate

Explanation / Answer

a. Effective annual interest rate = (100 / (100-discount rate) ) ^ (365 / (total period - discount period) ) - 1

= (100 / (100-1.8) ) ^ (365 / (60-10) ) -1 = (100 / 98.2) ^ (365 / 50) - 1

= 14.18%

Answer: 14.18%

b. Effective annual interest rate = (100 / (100-discount rate) ) ^ (365 / (total period - discount period) ) - 1

= (100 / (100-2.8) ) ^ (365 / (60-10) ) -1 = (100 / 97.2) ^ (365 / 50) - 1

= 23.04%

Answer: 23.04%

c. Effective annual interest rate = (100 / (100-discount rate) ) ^ (365 / (total period - discount period) ) - 1

= (100 / (100-1.8) ) ^ (365 / (75-10) ) -1 = (100 / 98.2) ^ (365 / 65) - 1

= 10.74%

Answer: 10.74%

d. Effective annual interest rate = (100 / (100-discount rate) ) ^ (365 / (total period - discount period) ) - 1

= (100 / (100-1.8) ) ^ (365 / (60-15) ) -1 = (100 / 98.2) ^ (365 / 45) - 1

= 15.87%

Answer: 15.87%

Hope this helped ! Let me know in case of any queries.

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