A firm offers terms of 1.4/10, net 30. What effective annual interest rate does
ID: 2826450 • Letter: A
Question
A firm offers terms of 1.4/10, net 30.
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 and 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 2.4/10, net 30, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
A firm offers terms of 1.4/10, net 30.
Explanation / Answer
a. effective interest calculation:
first let us calculate the interest for (30 days full period - 10 days discount period)
=> 20 days.
interest = 1.4 / (100-1.4) * 100
=>1.4/98.6 * 100
=>1.41988%.
=>0.0141988
this interest is for 20 days.
the effective annnual rate will be = [( 1 + rate for 20 days) * 365 days / 20 ] - 1
=> [(1.0141988)*365/20] - 1
=>18.5091281 - 1
=>17.5091281
=>17.51%.
Effective annual interest rate = 17.51%
b.if terms are 2.4/10 net 30.
interest for (30 -10 )=>20 days
is 2.4 / (100-2.4) *100
=>2.45901%.
=>0.0245901
effective annual interest rate will be = [[1+0.0245901]*365 /20] - 1
=>18.698769 - 1
=>17.70%...(rounded to two decimals).
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