Compute the cost of the following trade credit terms using the compounding formu

Question

Compute the cost of the following trade credit terms using the compounding formula, or effective annual rate. 4/10, net 45 4/15, net 30 3/10, net 60 2/10, net 45 When payment is made on the net due date, the APR of the credit terms of 4/10, net 45 is %. (Round to two decimal places.) The EAR of the credit terms of 4/10, net 45 is %. (Round to two decimal places.) When payment is made on the net due date, the APR of the credit terms of 4/15, net 30 is %. (Round to two decimal places.) The EAR of the credit terms of 4/15, net 30 is %. (Round to two decimal places.) When payment is made on the net due date, the APR of the credit terms of 3/10, net 60 is %. (Round to two decimal places.) The EAR of the credit terms of 3/10, net 60 is %. (Round to two decimal places.) When payment is made on the net due date, the APR of the credit terms of 2/10, net 45 is %. (Round to two decimal places.) The EAR of the credit terms of 2/10, net 45 is %. (Round to two decimal places.)

Explanation / Answer

Part A)

APR = (Discount rate / ( 1- Discount rate)) x 360/ off discount period

                = ( 0.04/ (1-0.04) x 360 / (45-10)

                = (0.04/ 0.96) x (360 / 35)

                = 42.86%

EAR =(1+ (Discount rate / ( 1- Discount rate)))^ 360/ off discount period    -1

         = (1+ ( 0.04/ (1-0.04)))^360/35    -1

          = 1.5218 -1

          = 52.18%

Part B)

APR = (Discount rate / ( 1- Discount rate)) x 360/ off discount period

                = ( 0.04/ (1-0.04) x 360 / (30-15)

                = (0.04/ 0.96) x (360 / 15)

                = 100%

EAR =(1+ (Discount rate / ( 1- Discount rate)))^ 360/ off discount period    -1

         = (1+ ( 0.04/ (1-0.04)))^360/15    -1

          = 2.6637 -1

          = 166.37%

Part C)

APR = (Discount rate / ( 1- Discount rate)) x 360/ off discount period

                = ( 0.03/ (1-0.03) x 360 / (60-10)

                = (0.03/ 0.97) x (360 / 50)

                = 22.27%

EAR =(1+ (Discount rate / ( 1- Discount rate)))^ 360/ off discount period    -1

         = (1+ ( 0.03/ (1-0.03)))^360/50    -1

          = 1.2490 -1

          = 24.90%

Part D)

APR = (Discount rate / ( 1- Discount rate)) x 360/ off discount period

                = ( 0.02/ (1-0.02) x 360 / (45-10)

                = (0.02/ 0.98) x (360 / 35)

                = 20.99%

EAR =(1+ (Discount rate / ( 1- Discount rate)))^ 360/ off discount period    -1

         = (1+ ( 0.02/ (1-0.02)))^360/35    -1

          = 1.2310 -1

          = 23.10%

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