If an invoice for $45,000 is billed 2/10 net 30,what is the highest annual interest rate that one would rationally pay to borrow money in order to take advantage of the cash discount if the only consideration is a lower annual interest rate than charged on the invoice?
A)9.9 percent
B)17.9 percent
C)23.9 percent
D)35.9 percent

Question

Quizplus · Accepted Answer

The cash discount is 2% for paying within 10 days instead of 30 days. The effective interest rate for not taking the discount is calculated as (2% / (1 - 0.02)) * (365 / (30 - 10)) = 36.73%. Therefore, the highest annual interest rate one would rationally pay to borrow money to take advantage of the discount is slightly less than this, making 35.9% the correct choice.

If an Invoice for $45,000 Is Billed 2/10 Net 30,what