A firm offers terms of 2/10, net 30 a-What effective annual interest rate does t

Question

A firm offers terms of 2/10, net 30

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. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

b. 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. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

c. 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. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

d. 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. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

a. Nominal cost of trade credit = [ Discount percentage / (100- Discount Percentage) ] x [ 365Days / (credit is Outstanding-Discount Period) Term 2/10, n30 Nominal Cost = 2/98*365/(30-10) = 37.24% Nominal Cost of credit = 37.24% EAR = (1 + periodic rate)^N – 1 Peridic rate =2/98=2.041% Periods per year=365/(30-10) =18.25 EAR = (1.02041)^18.25-1 44.59% So efferctive interest rate of credit = 44.59% b. Nominal cost of trade credit = [ Discount percentage / (100- Discount Percentage) ] x [ 365Days / (credit is Outstanding-Discount Period) Term 3/10, n30 Nominal Cost = 3/97*365/(30-10) = 56.44% Nominal Cost of credit = 56.44% EAR = (1 + periodic rate)^N – 1 Peridic rate =3/97=3.093% Periods per year=365/(30-10) =18.25 EAR = (1.03093)^18.25-1 74.35% So efferctive interest rate of credit = 74.35% c. Nominal cost of trade credit = [ Discount percentage / (100- Discount Percentage) ] x [ 365Days / (credit is Outstanding-Discount Period) Term 2/10, n60 Nominal Cost = 2/98*365/(60-10) = 14.90% Nominal Cost of credit = 14.90% EAR = (1 + periodic rate)^N – 1 Peridic rate =2/98=2.041% Periods per year=365/(60-10) =7.30 EAR = (1.02041)^7.30-1 15.89% So efferctive interest rate of credit =15.89% d Nominal cost of trade credit = [ Discount percentage / (100- Discount Percentage) ] x [ 365Days / (credit is Outstanding-Discount Period) Term 2/15, n30 Nominal Cost = 2/98*365/(30-15) = 49.66% Nominal Cost of credit = 49.66% EAR = (1 + periodic rate)^N – 1 Peridic rate =2/98=2.041% Periods per year=365/(30-15) =24.3                             24.3 EAR = (1.02041)^24.3-1 63.39% So efferctive interest rate of credit = 63.39%

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