Question

A buyer failed to take advantage of the vendor's credit terms of 2/10, n/45, but instead paid the invoice in full at the end of 45 days. By not taking advantage of the cash discount, the equivalent annual interest lost on the amount of the purchase is:

Answer 1

Answer: 20.86%

Explanation: From the question, the credit term is 2/10, n/45. Which means that the customer gets a 2% discount if payment is made within 10 days. But the customer did not make use of this offer. The equivalent annual Interest lost on the amount of purchases is :

365/ (45-10) * 0.02 = 365/35*2%

= 0.20857 *100= 20.86%

This is calculated using 365 days in a year.