Question

A store will give you a 2% discount on the cost of your purchase if you pay cash today. Otherwise, you will be billed the full price with payment due in 1 month. What is the implicit borrowing rate (EAR) being paid by customers who choose to defer payment for the month? Show your calcuation steps. If you use the financial calculator, tell me your inputs and output (i.e. pv,fv,n, i/Y, pmt).

Answer 1

Answer:

The implicit borrowing rate (EAR) being paid by customers who choose to defer payment for the month is 24.48%

Explanation:

In order to calculate the implicit borrowing rate we would have to calculate the following formula:

implicit borrowing rate=Discount%/(1-Discount%) *12/( payment months - discount month)

According to the given data we have the following:

Discount % =2

Payment days = 1 month

Therefore, implicit borrowing rate=2%/(1-2%)*12/1

implicit borrowing rate=(0.02/0.98)*12

implicit borrowing rate=24.48%

The implicit borrowing rate (EAR) being paid by customers who choose to defer payment for the month is 24.48%