A buyer failed to take advantage of the vendor's credit terms of 2/15,n/45,but instead paid the invoice in full at the end of 60 days.By not taking advantage of the cash discount,the equivalent annual interest lost on the amount of the purchase is:
A)12.2%
B)16.2%
C)18.9%
D)24.3%
E)24.5%

Question

Quizplus · Accepted Answer

The effective cost of not taking advantage of the cash discount can be calculated as the annual interest rate that is equivalent to the discount offered. 
The formula is: Effective annual interest rate = (Discount % / (100% - Discount %)) x (365 / (Payment days - Discount period))
Substituting the given values in the formula:
Effective annual interest rate = (2% / (100% - 2%)) x (365 / (45 - 15)) = 24.3%
Therefore, the equivalent annual interest lost on the amount of purchase is 24.3%.

A Buyer Failed to Take Advantage of the Vendor's Credit