A firm offers terms of 1/25, net 50. (Enter your answers as directed, but do not

Question

A firm offers terms of 1/25, net 50. (Enter your answers as directed, but do not round intermediate calculations.)

Requirement 1: 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).)

Effective annual interest rate %

Requirement 2: 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).)

Effective annual interest rate %

Requirement 3: What effective annual interest rate does the firm earn if the credit period is increased to 70 days? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Effective annual interest rate %

Requirement 4: What effective annual interest rate does the firm earn if the discount period is increased to 30 days? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Effective annual interest rate %

Explanation / Answer

Cost of trade credit: = (1+D÷(1-D))^(365÷n)-1 D is discount rate n is Number of days after discount period 1) 15.80% (1+0.01/(1-0.01))^(365/25)-1 2) 34.31% (1+0.02/(1-0.02))^(365/25)-1 3) 8.49% (1+0.01/(1-0.01))^(365/45)-1 4) 20.13% (1+0.01/(1-0.01))^(365/20)-1

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