What effective annual interest rate does the firm earn when a customer does not

Question

What effective annual interest rate does the firm earn when a customer does not take the discount? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

What effective annual interest rate does the firm earn if the discount is changed to 2 percent? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

What effective annual interest rate does the firm earn if the credit period is increased to 45 days? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

What effective annual interest rate does the firm earn if the discount period is increased to 15 days? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

1 Effective Annual Rate is Calculated by the following formula = [365/(Pay Period - Discount Period)] * [Discount% / (100% - Discount%)] Pay Period = 25 days Discount Period = 10 days Discount = 1% Effective Annual Rate = 365 / (25 - 10) * 1%/99% = 365/15 * 0.010101 = 24.3333 * 0.010101 = 0.245791 = 24.58% 2 Effective Annual Rate is Calculated by the following formula = [365/(Pay Period - Discount Period)] * [Discount% / (100% - Discount%)] Pay Period = 25 days Discount Period = 10 days Discount = 2% Effective Annual Rate = 365 / (25 - 10) * 2%/98% = 365/15 * 0.020408 = 24.3333 * 0.020408 = 0.496599 = 49.66% 3 Effective Annual Rate is Calculated by the following formula = [365/(Pay Period - Discount Period)] * [Discount% / (100% - Discount%)] Pay Period = 45 days Discount Period = 10 days Discount = 1% Effective Annual Rate = 365 / (45 - 10) * 1%/99% = 365/35 * 0.010101 = 10.42857 * 0.010101 = 0.105339 = 10.53% 4 Effective Annual Rate is Calculated by the following formula = [365/(Pay Period - Discount Period)] * [Discount% / (100% - Discount%)] Pay Period = 25 days Discount Period = 15 days Discount = 1% Effective Annual Rate = 365 / (25 - 15) * 1%/99% = 365/10 * 0.010101 = 36.5 * 0.010101 = 0.368687 = 36.87%

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