Wyatt Oil purchases goods from its suppliers on terms 3/20 net 40.The effective annual cost to Wyatt if they do not take the discount and pay on day 40 is closest to:

Question

Quizplus · Accepted Answer

C)The interest rate per period is $3/$97 = .031.If the firm delays payment until the 40th day,it has use of the funds for 20 days beyond the discount period.There are 365/20 = 18.25 20 day periods in one year.Thus,the effective annual cost is (1 + .031)^18.25 - 1 = .746 or 74.6%

Wyatt Oil Purchases Goods from Its Suppliers on Terms 3/20