If a company purchases merchandise on terms of 1/10, n/30, the cash discount available (assuming a 360-day year) is equivalent to an effective annual interest rate of

Question

Quizplus · Accepted Answer

The terms 1/10, n/30 mean the buyer can take a 1% discount (on the net amount of goods purchased) if the buyer pays within 10 days. If the buyer does not pay within 10 days, the net amount is due within 30 days.
To calculate the effective annual interest rate of this cash discount, we can use the formula:

Effective annual interest rate = (Discount % / (100% - Discount %)) x (360 / (Term days - Discount period))

In this case, the discount percentage is 1%, the term days are 30, and the discount period is 10. Substituting in the formula, we get:

Effective annual interest rate = (1% / (100% - 1%)) x (360 / (30 - 10))
Effective annual interest rate = (1% / 99%) x 18
Effective annual interest rate = 0.01818 or 1.818%

So the cash discount available has an effective annual interest rate of 1.818%, which is closest to choice C (18%).

If a Company Purchases Merchandise on Terms of 1/10, N/30