Suppose you purchase goods on terms of 2/10, net 50. Taking compounding into account, what annual rate of interest is implied by the cash discount? (Assume a year has 365 days.)

Question

Quizplus · Accepted Answer

The annual rate of interest implied by the cash discount is 20.2%. This is because the cash discount is 2% and the net period is 50 days. So, the effective annual rate of interest is (1 - 2/100) ^ (365/50) - 1 = 20.2%.

Suppose You Purchase Goods on Terms of 2/10, Net 50