You hotel has been offered credit terms of 1/12 net 35. 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 can be calculated using the formula for the effective interest rate when taking advantage of a trade discount. The formula is $$EAR = \left(1 + \frac{Discount\%}{1 - Discount\%}\right)^{\frac{365}{Days\ after\ discount\ period}} - 1$$. Here, the discount is 1% (1/12), and the discount period is 35-12=23 days. Plugging the values into the formula gives an EAR of approximately 16.03%.

You Hotel Has Been Offered Credit Terms of 1/12 Net