What effective annual interest rate does the firm earn when a customer does not
ID: 2724761 • 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 2 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 45 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 15 days? (Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
References
eBook & Resources
A firm offers terms of 1/10, net 25. (Enter your answers as directed, but do not round intermediate calculations.)Explanation / Answer
1/10 net 25 means 1% discount when paid within 10 days or otherwise due in 25 days
Requirement 1-
Discount periods per year = 360/(25-10) = 24 periods
Therefore, EAR = 24 *(0.01/0.99) = 24.24%
Requirement 2 -
EAR = 24 * (0.02/0.98) = 48.97%
Requirement 3 -
If the credit period is increased to 45 days, discount periods = 360/(45-10) = 10.28 periods
EAR = 10.28 * (0.01/0.99) = 10.38%
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