A. How much can company Y deduct from the bill if it pays on day 10? B. How many

Question

A. How much can company Y deduct from the bill if it pays on day 10?
B. How many extra days of credit can company Y receive if it passes up the cash discount?
C. What is the effective annual rate of interest if Y pays on the due date rather than day 10? (Use 365 days in a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Company X sells on a 1/10, net 60, basis. Company Y buys goods with an invoice of $5,500. a. How much can company Y deduct from the bill if it pays on day 10? Discount b. How many extra days of credit can company Y receive if it passes up the cash discount? Number of days days c. What is the effective annual rate of interest if Y pays on the due date rather than day 10? (Use 365 days in a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Effective annual rate

Explanation / Answer

a) 1/10 net 60 means that if company Y pays within 10 days, it will get a 1% discount, otherwise the whole amount is due in 60 days.

So, Cash discount = $5500 x 1% = $55

b) Extra days of credit = 60 days - 10 days = 50 days

c) If the discount is taken, the company Y would pay $5445. In case it is not taken, it would pay $5500. The interest/ difference paid is $55 for every 50 days of extra credit.

Difference in percentage = $55 / $5445 = 1.01010101%

Effective annual rate is computed using the following formula -

EAR = (1 + r/m)m - 1

Where, r = annual rate, m = no. of times compounded in a year = 365 / 50

1.01010101% is already r / m as it is rate per 50 days. So, we have -

EAR = (1 + 0.0101010101)365/50 - 1 = 0.076125889 or 7.61% (Their can be rounding off difference, you can try 7.62 or 7.63 as well)

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