Question

A firm offers terms of 1/10, net 35. a. What effective annual interest rate does the firm earn when a customer does not take the discount? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What effective annual interest rate does the firm earn if the discount is changed to 2 percent? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What effective annual interest rate does the firm earn if the credit period is increased to 55 days? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) d. What effective annual interest rate does the firm earn if the discount period is increased to 15 days? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Effective annual interest rate b. Effective annual interest rate C. Effective annual interest rate d. Effective annual interest rate % % % 1

Answer 1

a. Effective cost of trade credit = [1 + (1/99)]^{[365 / (35 - 10)]} - 1 = 0.1580 or 15.80%

b. Effective cost of trade credit = [1 + (2/98)]^{[365 / (35 - 10)]} - 1 = 0.3431 or 34.31%

c. Effective cost of trade credit = [1 + (1/99)]^{[365 / (55 - 10)]} - 1 = 0.0849 or 8.49%

d. Effective cost of trade credit = [1 + (1/99)]^{[365 / (35 - 15)]} - 1 = 0.2013 or 20.13%