Company X sells on a 3/25, net 90, basis. Customer Y buys goods with an invoice

Question

Company X sells on a 3/25, net 90, basis. Customer Y buys goods with an invoice of $1,500. a. How much can company Y deduct from the bill if it pays on day 25? Discount $ b. How many extra days of credit can company Y receive if it passes up the cash discount? Number of days days c. What is the effective annual rate of interest if Y pays on the due date rather than day 25? (Use 365 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places.) Effective annual rate of interest %

Explanation / Answer

3/25, net 90, basis means 3% cash discount if paid within 25 days else payment to be made within 90 days. Invoice value 1500 Discount if paid within 25 days 45 Extra days of credit = 90 days - 25 days = 65 days Effective annual rate of interest savings in days 65 Discount 45 Amount left to pay 1455 Discount / amount left to pay 0.030927835 discount debtor turnover/no. of periods 5.615384615 Effective annual rate of interest [1+ (Discount / amount left to pay)]^discount debtor turnover/no. of periods   - 1 18.65%

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