A firm offers terms of 2.8/7, net 30. a. What effective annual interest rate doe

Question

A firm offers terms of 2.8/7, net 30.

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 round your final answer to 2 decimal places. (e.g., 32.16))

b.

What effective annual interest rate does the firm earn if the terms are changed to 3.8/7, net 30, 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))

c.

What effective annual interest rate does the firm earn if the terms are changed to 2.8/7, net 45, 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))

d.

What effective annual interest rate does the firm earn if the terms are changed to 2.8/12, net 30, 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))

Explanation / Answer

Hi,

Please find the answers as follows:

Part A:

Effective Rate of Interest = [1+2.8/(100-2.8)]^365/23 - 1 = 56.94%

Part B:

Effective Rate of Interest = [1+3.8/(100-3.8)]^365/23 - 1 = 84.93%

Part C:

Effective Rate of Interest = [1+2.8/(100-2.8)]^365/38 - 1 = 31.36%

Part D:

Effective Rate of Interest = = [1+2.8/(100-2.8)]^365/18 - 1 = 77.87%

Thanks

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