A firm offers terms of 1.4/10, net 60. What effective annual interest rate does
ID: 2635237 • Letter: A
Question
A firm offers terms of 1.4/10, net 60.
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 round your final answer to 2 decimal places. (e.g., 32.16))
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 round your final answer to 2 decimal places. (e.g., 32.16))
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 round your final answer to 2 decimal places. (e.g., 32.16))
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 round your final answer to 2 decimal places. (e.g., 32.16))
A firm offers terms of 1.4/10, net 60.
Explanation / Answer
a. 1.4/10, net 60.
Interest rate for the term of the discount = 1.4/98.6 = 1.41% for 60-10 = 50 days
effective annual interest rate, EAR = (1+periodic interest rate)m - 1
= (1.0141)(365/50) - 1 =0.1076 or 10.76%
b.
b. 2.4/10, net 60.
Interest rate for the term of the discount = 2.4/97.6 = 2.45% for 60-10 = 50 days
effective annual interest rate, EAR = (1+periodic interest rate)m - 1
= (1.0245)(365/50) - 1 =0.1932 or 19.32%
c.1.4/10, net 75.
Interest rate for the term of the discount = 1.4/98.6 = 1.41% for 75-10 = 65 days
effective annual interest rate, EAR = (1+periodic interest rate)m - 1
= (1.0141)(365/65) - 1 =0.0817 or 8.71%
d. 1.4/15, net 60
Interest rate for the term of the discount = 1.4/98.6 = 1.41% for 60 - 15= 45 days
effective annual interest rate, EAR = (1+periodic interest rate)m - 1
= (1.0141)(365/45) - 1 =0.1202 or 12.02%
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