Question

A firm offers terms of 1.4/10, net 60.

  

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 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 terms are changed to 2.4/10, net 60, and the customer does not take the discount? (Use 365 days a year. 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 terms are changed to 1.4/10, net 75, and the customer does not take the discount? (Use 365 days a year. 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 terms are changed to 1.4/15, net 60, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

GIVEN:   A FIRM OFFERS TERMS OF 1.4/10, NET 60.

ANSWER-(a).

Discount Rate = 1.40%
Discount Period = 10 days
Credit Period = 60 days

Effective Annual Rate = [1 + Discount Rate / (1 - Discount Rate)]^[365 / (Credit Period - Discount Period)] - 1
Effective Annual Rate = [1 + 0.014 / (1 - 0.014)]^[365 / (60 - 10)] - 1
Effective Annual Rate = 1.01419^7.30 - 1
Effective Annual Rate = 1.1083 - 1
Effective Annual Rate = 0.1083 or 10.83%

ANSWER-(b).

Discount Rate = 2.40%
Discount Period = 10 days
Credit Period = 60 days

Effective Annual Rate = [1 + Discount Rate / (1 - Discount Rate)]^[365 / (Credit Period - Discount Period)] - 1
Effective Annual Rate = [1 + 0.024 / (1 - 0.024)]^[365 / (60 - 10)] - 1
Effective Annual Rate = 1.02459^7.30 - 1
Effective Annual Rate = 1.1940 - 1
Effective Annual Rate = 0.1940 or 19.40%

ANSWER-(c).

Discount Rate = 1.40%
Discount Period = 10 days
Credit Period = 75 days

Effective Annual Rate = [1 + Discount Rate / (1 - Discount Rate)]^[365 / (Credit Period - Discount Period)] - 1
Effective Annual Rate = [1 + 0.014 / (1 - 0.014)]^[365 / (75 - 10)] - 1
Effective Annual Rate = 1.01419^5.61538 - 1
Effective Annual Rate = 1.0823 - 1
Effective Annual Rate = 0.0823 or 8.23%

ANSWER-(d).

Discount Rate = 1.40%
Discount Period = 15 days
Credit Period = 60 days

Effective Annual Rate = [1 + Discount Rate / (1 - Discount Rate)]^[365 / (Credit Period - Discount Period)] - 1
Effective Annual Rate = [1 + 0.014 / (1 - 0.014)]^[365 / (60 - 15)] - 1
Effective Annual Rate = 1.01419^8.1111 - 1
Effective Annual Rate = 1.1211 - 1
Effective Annual Rate = 0.1211 or 12.11%.