Company X sells on a 2/15, net 90, basis. Customer Y buys goods with an invoice

Question

Company X sells on a 2/15, net 90, basis. Customer Y buys goods with an invoice of $4,000.

How much can company Y deduct from the bill if it pays on day 15?

How many extra days of credit can company Y receive if it passes up the cash discount?

What is the effective annual rate of interest if Y pays on the due date rather than day 15? (Use 365 days in a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Company X sells on a 2/15, net 90, basis. Customer Y buys goods with an invoice of $4,000.

Explanation / Answer

a)If payment is made within discount period (15 days) ,2% of invoice value will be allowed as discount

   Discount = 4000 * .02 = $ 80

b)Company Y will receive Extra 75 days for payment if it passes up cash discount (90days -15 days)

c)Effective Interest rate = [Discount rate / (100 -discount rate) ] *[ 360 /(Full period -discount period)]

                                  =[ 2 / (100 - 2 ) ]* [360 /(90-15)]

                                 = [2 /98 ] * [365 / 75]

                                 = .02041 * 4.867

                                = .0993 or 9.93%

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