Question

A firm offers terms of 1.8/10, net 30. a. 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.) Effective annual interest rate % b. What effective annual interest rate does the firm earn if the terms are changed to 2.8/10, net 30, 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.) Effective annual interest rate % c. What effective annual interest rate does the firm earn if the terms are changed to 1.8/10, net 60, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations.

Answer 1

Answer:

a) 39.304%

b) 67.91%

c) 14.17%

Explanation:

a. Given"

Offer terms = 1.8/10

Now,

The Effective annual interest rate is given as:

= $(\frac{\textup{100}}{\textup{100 - Discount rate}})^{(\frac{365}{total period - discount period})}-1$

on substituting the respective values, we get

= $(\frac{\textup{100}}{\textup{100 - 1.8}})^{\frac{365}{(30 - 10)}}-1$

= 0.39304

or

= 39.304%

similarly,

b. for 2.8/10 net 30

Effective annual interest rate = $(\frac{\textup{100}}{\textup{100 - 2.8}})^{(\frac{365}{(30 - 10)})}-1$

= 0.6791

or

= 67.91%

c. for 1.8/10 net 60

Effective annual interest rate = $(\frac{\textup{100}}{\textup{100 - 1.8}})^{(\frac{365}{(60 - 10)})}-1$

= 0.1417

or

= 14.17%