Your supplier grants you credit terms of 2/10, net 40. What is the effective annual rate of not taking the discount if you purchase $2,500 worth of merchandise?

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The effective annual rate of not taking the discount can be calculated using the formula for the cost of not taking a trade discount: $$ \text{Cost} = \left( \frac{\text{Discount Percentage}}{100 - \text{Discount Percentage}} \right) \times \left( \frac{360}{\text{Payment Days} - \text{Discount Days}} \right) $$ For this scenario, the discount is 2% (2/10), and the full payment period is 40 days if the discount is not taken, with the discount period being 10 days. Plugging these values into the formula gives: $$ \text{Cost} = \left( \frac{2}{98} \right) \times \left( \frac{360}{40 - 10} \right) = \left( \frac{2}{98} \right) \times \left( \frac{360}{30} \right) = \left( \frac{2}{98} \right) \times 12 = \frac{24}{98} $$ Converting this fraction to a percentage and annualizing it (since the formula gives a per period rate for the specific period between the discount end and the net due date, and this needs to be scaled up to a yearly rate assuming the cycle repeats throughout the year) gives an effective annual rate of approximately 27.9%.

Your Supplier Grants You Credit Terms of 2/10, Net 40