Suppose that a firm sells goods on terms of 2/30, net 60. Those customers who do not take the cash discount are effectively borrowing money at approximately 2 percent per year.

Question

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Customers who do not take the cash discount of 2% for paying within 30 days but instead pay at 60 days are effectively borrowing at a much higher annual rate than 2%. The discount is forfeited for the use of money for an additional 30 days, not for a whole year, making the effective annual interest rate much higher when annualized.

Suppose That a Firm Sells Goods on Terms of 2/30