You hotel has been offered credit terms of 1/8 net 45. What is the effective annual rate of return earned if the discount offered is taken?

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Quizplus · Accepted Answer

The effective annual rate of return (EAR) can be calculated using the formula for EAR when taking advantage of a trade discount: EAR = (1 + (discount rate / (1 - discount rate)))^(365 / (days in payment period - discount period)) - 1. Here, the discount rate is 1/8 or 0.125, the discount period is 8 days, and the payment period is 45 days. Plugging these values into the formula gives EAR = (1 + (0.125 / (1 - 0.125)))^(365 / (45 - 8)) - 1, which approximates to 9.96%.

You Hotel Has Been Offered Credit Terms of 1/8 Net