Determine the annual effective rate of a customer that does not take advantage of credit terms of 3/15, n/30.
A)109.84%
B)69.84%
C)29.84%
D)9.84%

Question

Quizplus · Accepted Answer

The terms 3/15, n/30 mean that a customer can take a 3% discount if they pay within 15 days; otherwise, the full amount is due in 30 days. If the customer does not take advantage of the discount, effectively, they are choosing to pay a premium for the extra 15 days of credit. The equivalent interest rate for this 15-day period can be calculated as $ \frac{3\%}{97\%} $, which annualizes to $ \left(1 + \frac{3\%}{97\%}\right)^{24} - 1 $ (since there are 24 15-day periods in a year), resulting in approximately 109.84%.

Determine the Annual Effective Rate of a Customer That Does