What effective annual interest rate does the firm earn when a customer does not
ID: 2769325 • Letter: W
Question
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
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
What effective annual interest rate does the firm earn if the credit period is increased to 65 days? (Enter your answer as a percentage rounded to 2 decimal places
What effective annual interest rate does the firm earn if the discount period is increased to 20 days? (Enter your answer as a percentage rounded to 2 decimal places
A firm offers terms of 2/15, net 45. (Enter your answers as directed, but do not round intermediate calculations.)Explanation / Answer
1.What effective annual interest rate does the firm earn when a customer does not take the discount?
Effective interest rate = discount %/(100-discount %) X 360/(FT - DP)
Where:
FT = the full term allowed for payment in days
DP = the discount period allowed for payment in days
pay an invoice with terms of 2/15, net 45. Plugging into the formula:
Effective interest rate = 2/(100-2) X 360/(45-15)
= 2/98 X 360/30
= 24.49%
2.What effective annual interest rate does the firm earn if the discount is changed to 3 percent?
pay an invoice with terms of 3/15, net 45. Plugging into the formula:
Effective interest rate = 3/(100-3) X 360/(45-15)
= 3/97 X 360/30
= 37.10%
3.What effective annual interest rate does the firm earn if the credit period is increased to 65 days?
pay an invoice with terms of 2/15, net 65. Plugging into the formula:
Effective interest rate = 2/(100-2) X 360/(65-15)
= 2/98 X 360/40
= 18.36%
4.What effective annual interest rate does the firm earn if the discount period is increased to 20 days?
pay an invoice with terms of 2/20, net 45. Plugging into the formula:
Effective interest rate = 2/(100-2) X 360/(45-20)
= 2/98 X 360/25
=29.38%
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