You are doing some comparison shopping. Store A offers credit terms of 1/10, net 20. Store B offers credit terms of 2/10, net 10 and Store C offers credit terms of 2/5, net 30. Given this information,
Which one of the following statements is correct?

Question

Quizplus · Accepted Answer

To evaluate the best credit terms, we need to consider both the discount and the payment period. 
For Store A, there is a 1% discount offered if payment is made within 10 days, and the payment is due in 20 days. This is equivalent to a 18.3% annual percentage rate (APR) if the discount is not taken, which is not very favorable. 
For Store B, there is a 2% discount if payment is made within 10 days, and the payment is due in 10 days. This is equivalent to a 36.7% APR if the discount is not taken, which is worse than Store A, but we have a shorter payment period. So if we have the cash to pay within 10 days, Store B offers the best terms. 
For Store C, there is a 2% discount if payment is made within 5 days, and the payment is due in 30 days. This is equivalent to a 24.5% APR if the discount is not taken, which is better than Store A. However, the payment period is longer, and we need to consider the opportunity cost of the money tied up in the payment. So unless we cannot pay within 10 days, Store B offers the best terms. Therefore, the correct answer is D.

You Are Doing Some Comparison Shopping