A firm offers terms of 1.4/10, net 60. What effective annual interest rate does

Question

A firm offers terms of 1.4/10, 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. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What effective annual interest rate does the firm earn if the terms are changed to 2.4/10, 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.)

What effective annual interest rate does the firm earn if the terms are changed to 1.4/10, net 75, 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.)

What effective annual interest rate does the firm earn if the terms are changed to 1.4/15, 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.)

A firm offers terms of 1.4/10, net 60.

Explanation / Answer

Solution-

a).

A firm offers terms of 1.4/10, net 60.- It means that as per company's policy debtors are provided with credit period of 60 days, but if debtor pays with in 10 days than cash discount of 1.4% is allowed.

Effective annual interest rate does the firm earn when a customer does not take the discount:

= 1.4 / 50 * 365

= 10.22%

similarly for b & c part

b). Effective annual interest rate does the firm earn when a customer does not take the discount-

= 2.4 / 50 * 365

= 17.52%

c). Effective annual interest rate does the firm earn when a customer does not take the discount-

   = 1.4 / 65 * 365

   = 7.86%

d). Effective annual interest rate does the firm earn when a customer does not take the discount-

   = 1.4 / 45 * 365

   = 11.35 %

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