Your ﬁrm factors its trade receivables immediately at a 3% discount.The average collection period is 41.95 days.Assume that all accounts are collected in full.What is the effective annual interest rate
On this arrangement?

Question

Quizplus · Accepted Answer

The effective annual interest rate (EAR) can be calculated using the formula for EAR when discounting is involved: EAR = [1 - (discount rate / (1 - discount rate))]^(365 / days) - 1. Here, the discount rate is 3% or 0.03, and the days are 41.95. Plugging these values into the formula gives EAR = [1 - (0.03 / (1 - 0.03))]^(365 / 41.95) - 1, which calculates to approximately 30.3%.

Your ﬁRm Factors Its Trade Receivables Immediately at a 3