A firm offers terms of 2.4/7, net 30. What effective annual interest rate does t

Question

A firm offers terms of 2.4/7, net 30. 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. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual interest rate What effective annual interest rate does the firm earn if the terms are changed to 3.4/7, net 30, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual interest rate What effective annual interest rate does the firm earn if the terms are changed to 2.4/7, net 60, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual interest rate What effective annual interest rate does the firm earn if the terms are changed to 2.4/12, net 30, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual interest rate

Explanation / Answer

Answer 1.

Terms of the firm is 2.4/7, net 30

Here, discount is 2.4%

Full allowed payment days = 30

Discount days = 7 days

Effective cost of credit = (1 + Discount %/(1-Discount %))^(365/(Full allowed payment days - Discount days)) - 1

= (1 + 0.024/0.976)^(365/(30-7)) - 1

= (1 + 0.024/0.976)^(365/23) - 1

= 0.4704 = 47.04%

Answer 2.

Terms of the firm is 3.4/7, net 30

Here, discount is 3.4%

Full allowed payment days = 30

Discount days = 7 days

Effective cost of credit = (1 + Discount %/(1-Discount %))^(365/(Full allowed payment days - Discount days)) - 1

= (1 + 0.034/0.966)^(365/(30-7)) - 1

= (1 + 0.034/0.966)^(365/23) - 1

= 0.7314 = 73.14%

Answer 3.

Terms of the firm is 2.4/7, net 60

Here, discount is 2.4%

Full allowed payment days = 60

Discount days = 7 days

Effective cost of credit = (1 + Discount %/(1-Discount %))^(365/(Full allowed payment days - Discount days)) - 1

= (1 + 0.024/0.976)^(365/(60-7)) - 1

= (1 + 0.024/0.976)^(365/53) - 1

= 0.1821 = 18.21%

Answer 4.

Terms of the firm is 2.4/12, net 30

Here, discount is 2.4%

Full allowed payment days = 30

Discount days = 12 days

Effective cost of credit = (1 + Discount %/(1-Discount %))^(365/(Full allowed payment days - Discount days)) - 1

= (1 + 0.024/0.976)^(365/(30-12)) - 1

= (1 + 0.024/0.976)^(365/18) - 1

= 0.6366 = 63.66%

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