What effective annual interest rate does the firm earn when a customer does not
ID: 2719724 • Letter: W
Question
What effective annual interest rate does the firm earn when a customer does not take the discount? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
What effective annual interest rate does the firm earn if the discount is changed to 3 percent? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
What effective annual interest rate does the firm earn if the credit period is increased to 80 days? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
What effective annual interest rate does the firm earn if the discount period is increased to 20 days? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
A firm offers terms of 2/15, net 60. (Enter your answers as directed, but do not round intermediate calculations.)Explanation / Answer
Effective annual interest rate
The formula is (360 (or 365) / Discount Days) x (Disc % / 1 - Disc %) = APR. But it then should be converted to EAR for the true cost.
Terms 2/15 net 60 means there are 45 Discount Days, and 360 / 45 = 8 Discount periods per year.
So 8 x (.02 / .98) = 8 x 16.33% APR, or 17.55% EAR.
What effective annual interest rate does the firm earn if the discount is changed to 3 percent
The formula is (360 (or 365) / Discount Days) x (Disc % / 1 - Disc %) = APR. But it then should be converted to EAR for the true cost.
Interest rate = 0.03/0.97 = 0.0309 = 3.09%
And EAR = (1+0.0309)^360/30-1 = 44.08%
What effective annual interest rate does the firm earn if the credit period is increased to 80 days
The formula is (360 (or 365) / Discount Days) x (Disc % / 1 - Disc %) = APR. But it then should be converted to EAR for the true cost.
Interest rate = 0.02/0.98 = 0.02041= 2.04%
And EAR = (1+0.02041)^360/65-1 = 11.84%
What effective annual interest rate does the firm earn if the discount period is increased to 20 days
The formula is (360 (or 365) / Discount Days) x (Disc % / 1 - Disc %) = APR. But it then should be converted to EAR for the true cost.
Interest rate = 0.02/0.98 = 0.02041= 2.04%
And EAR = (1+0.02041)^360/20-1 =43.86%
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