18-8. Your supplier offers terms of 2/15, net 40. What is the effective annual c

Question

18-8. Your supplier offers terms of 2/15, net 40. What is the effective annual cost of trade credit ir you choose to forgo the discount and pay on day 40?
The effective annual cost is _____%
(Enter your response as a percent rounded to two decimal places)

Problem setuD
Follow these steps to calculate the cost of not taking the discount:
1. Calculate the interest rate per period.
The interest rate per period is found as follows:
Discount for early payment /(100 - Discount for early payment)= r.

2. Calculate the effective annual rate (EAR).
EAR = (1 + r) 1/ - 1,
where:
r is the interest rate per period
n is the number of periods in a year.

The effective annual cost is _____%. (Enter your response as a percent rounded to two decimal places.)

Explanation / Answer

1

2% / 100 -2

= 2% / 98%

= 0.0204 or 2.04%

Interest rate is 2.04%

2 Calculate the effective annual rate (EAR).
EAR = (1 + r) 1/ - 1,

EAR = (1+0.0204) 1 / -1

        = 1.0204 * 1 / 1

        = 1.0204 / 1

        =  - 1.0204

        = -1.02

Is given by you but its not correct one

EAR = (1+i/n)^n – 1 is a right formula to calculate EAR

SO EAR = (1+0.0204/12) ^12 – 1      Where n = 12 months

= 1.0205 - 1

= 0.02059

Round off to 0.02

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