A firm offers terms of 2.2/7, net 60. What effective annual interest rate does t

Question

A firm offers terms of 2.2/7, 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 3.2/7, 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 2.2/7, 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 2.2/12, 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 2.2/7, net 60.

Explanation / Answer

a)

Cost of Trade Credit (Effective Annual Rate of Interest) = (1+Discount Rate/(1- Discount Rate))^(365/Number of Days Beyond Discount Period) - 1

Discount Rate = 2.2% or .022 (given in the question as 2/5 which indicates 2% if payment is made within 5 days)

1 - Discount Rate = 1 - .022 = .978

Number of Days Beyond Discount Period = 60 - 7 = 53

Effective Annual Rate of Interest = (1+(.022/(1-.022))^(365/53) - 1 = 16.55%

Answer is 16.55%.

b.

Cost of Trade Credit (Effective Annual Rate of Interest) = (1+Discount Rate/(1- Discount Rate))^(365/Number of Days Beyond Discount Period) - 1

Effective annual interest rate = (100/(100-3.2))^(365/(60-7))-1

                                          = 25.10

c. Effective annual interest rate = (100/(100-2.2))^(365/(75-7))-1

                                              = 12.68%

d. Effective annual interest rate = (100/(100-2.2))^(365/(60-12))-1

                                              = 18.43%

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