A firm offers terms of 2/20, net 60. (Enter your answers as directed, but do not

Question

A firm offers terms of 2/20, net 60. (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).) Requirement 2: What effective annual interest rate does the firm earn if the discount is changed to 3 percent? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Requirement 3: What effective annual interest rate does the firm earn if the credit period is increased to 80 days? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Requirement 4: What effective annual interest rate does the firm earn if the discount period is increased to 25 days? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

2/20 net 60 APR = (360/Discount Days)*(Disc %/1-Disc %) EAR = (1+APR/p)^p Where p= no of periods per year Disc % 2% 1-Disc % 98% Discount Days 40 1 If customer does not take discount Discount Days 60 Discount periods per year = 360/60 6 APR 0.122449 12.25% EAR 1.128925 12.89% 2 If discount is changed to 3% Discount Days 40 Discount periods per year = 360/40 9 APR 0.278351 27.84% EAR 1.315453 31.55% 3 If Credit period increased to 80 days Discount Days 60 Discount periods per year = 360/60 6 APR 0.122449 12.25% EAR 1.128925 12.89% 4 If Discount period increased to 25 days Discount Days 35 Discount periods per year = 360/35 10.28571 APR 0.209796 20.98% EAR 1.230829 23.08%

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