Your firm purchases goods from its supplier on terms of 2 1/10, net 40. a. What
ID: 2591759 • Letter: Y
Question
Your firm purchases goods from its supplier on terms of 2 1/10, net 40. a. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 402 b. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 50? a. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 40? The effective annual cost is%. (Round to two decimal places.) b. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 502 The effective annual cost is [ ]%. (Round to two decimal places.)Explanation / Answer
Answer a.
Discount Rate = 2.1%
Discount Period = 10 days
Days to pay = 40
Effective Annual Cost = [1 + Discount Rate/(100%- Discount Rate)]^[365/(days to pay-discount period)] - 1
Effective Annual Cost = [1 + 2.1%/(100%-2.1%)]^[365/(40-10)] - 1
Effective Annual Cost = [1 + 2.1%/97.9%]^[365/30] - 1
Effective Annual Cost = 1.02145^12.16667 - 1
Effective Annual Cost = 1.2946 - 1
Effective Annual Cost = 0.2946 = 29.46%
Answer b.
Discount Rate = 2.1%
Discount Period = 10 days
Days to pay = 50
Effective Annual Cost = [1 + Discount Rate/(100%- Discount Rate)]^[365/(days to pay-discount period)] - 1
Effective Annual Cost = [1 + 2.1%/(100%-2.1%)]^[365/(50-10)] - 1
Effective Annual Cost = [1 + 2.1%/97.9%]^[365/40] - 1
Effective Annual Cost = 1.02145^9.125 - 1
Effective Annual Cost = 1.2137 - 1
Effective Annual Cost = 0.2137 = 21.37%
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