C+ Notes' business is booming, and it needs to raise more capital. The company purchases supplies from a single supplier on terms of 1/10, net 20 days, and it currently takes the discount. One way of getting the needed funds would be to forgo the discount, and C+'s owner believes she could delay payment to 40 days without adverse effects. What is the effective annual rate of stretching the accounts payable?
A) 10.00%
B) 11.11%
C) 11.75%
D) 12.29%
E) 13.01%

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) of forgoing the discount can be calculated using the formula: EAR = [(1 + (Discount % / (1 - Discount %)))^(365 / (New Payment Days - Discount Days))] - 1. Plugging in the values: EAR = [(1 + (0.01 / (1 - 0.01)))^(365 / (40 - 10))] - 1 = 13.01%.

C+ Notes' Business Is Booming, and It Needs to Raise