A firm offers terms of 1.6/10, net 60. What effective annual interest rate does

Question

A firm offers terms of 1.6/10, net 60.

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 2.6/10, 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 1.6/10, 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))

What effective annual interest rate does the firm earn if the terms are changed to 1.6/15, 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))

A firm offers terms of 1.6/10, net 60.

Explanation / Answer

similar problem will help you in solving the answer

Answer: Your question regards ?prompt payment discounts,? which are commonly
used in industry and result in phenomenal returns. The format of
prompt payment discounts is generally:

Percentage discount / if paid within x days of invoice, OTHERWISE net in x days

So, your 2/10, net 30 is:

2% discount if paid in 10 days, otherwise due in 30 days

There?s a detailed discussion of ?how expensive? this is in trade
financing and specifics on its calculation in Slide 19 of this
presentation. (Note that Pamela Hall uses a 365-day year in the
calculation ? and you?re using a 360-day year ? so results are
slightly different):




You?re getting a 2% discount on a 20-day advance in payments.
There are 18 20-day periods in a year.
Your discount is 18 x 2% = 36% per year.

---

In reality, prompt payment discounts are used to encourage businesses
(and governments) to pay early -- and not let the NET30 terms slip to
actual payments in 45 or 50 or 60 days. They are particularly
effective with traditional "slow pay" customers such as government
agencies and school districts.


Google search strategy:
?prompt payment discount? 2%/10 net 30

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