A firm offers terms of 2.0/10, net 30. What effective annual interest rate does

Question

A firm offers terms of 2.0/10, 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 3/10, 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 2/10, 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))

What effective annual interest rate does the firm earn if the terms are changed to 2/15, 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))

A firm offers terms of 2.0/10, net 30.

Explanation / Answer

Terms 2.0/10, net 30 means if payment is made within 10 days, 2% discount will be given. Otherwise, due date is 30 days.

a. Customer does not take discount means customer pays in 30 days.

Effective interest rate = (365/20) * (2/98) = 37.24 %

b. Now the discount rate is 3%

Effective annual interest rate = (365/20) * (3/97) = 56.44%

c. Now the due date is 60 days

Effective annual interest rate = (365/50) * (2/98) = 14.90%

d. Now the discount is allowed up to 15 days @ 2%

Effective annual interest rate = (365/15) * (2/98) = 49.66%

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