Question

Problem 17-11 Terms of Sale [LO 2]

A firm offers terms of 1/10, net 30.

Requirement 1:

What effective annual interest rate does the firm earn when a customer does not take the discount? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Effective annual interest rate

%

Requirement 2:

What effective annual interest rate does the firm earn if the discount is changed to 2 percent? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Effective annual interest rate

%

Requirement 3:

What effective annual interest rate does the firm earn if the credit period is increased to 40 days? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Effective annual interest rate

%

Requirement 4:

What effective annual interest rate does the firm earn if the discount period is increased to 20 days? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Effective annual interest rate

%

References

eBook & Resources

Answer 1

discount = 1%
discount period = 10 days
days of credit = 30
1) interest rate = 1%/(100%-1%) = 0.01/0.99
Effective interest rate = (1 + Discount/(100 -discount) ^365/( days of credit - dicount period ) -1
= (1 + 0.01/0.99)^(365/(30 -10)) -1= 0.2013 or 20.13%

2) If discount rate = 2%
Then Interest rate = 2%/(100%-2%) = 2/98
Effective interest rate = (1 + Discount/(100 -discount) ^365/( days of credit - dicount period ) -1
= (1 + 0.02/0.98)^(365/(30 -10)) -1= 0.4459 or 44.59%

3) If credit days increased to 40 then
Effective interest rate = (1 + Discount/(100 -discount) ^365/( days of credit - dicount period ) -1
= (1 + 0.01/0.99)^(365/(40 -10)) -1= 0.13006 or 13.01%

4)If discount days increased to 20 then
Effective interest rate = (1 + Discount/(100 -discount) ^365/( days of credit - dicount period ) -1
= (1 + 0.01/0.99)^(365/(30 -20)) -1= 0.4432 or 44.32%

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