Lemoyne mailed an invoice today in the amount of $1,268 with terms of 2/7 net 30.What is the cost of credit to the customer if they pay on the last day of the credit period? Assume a 365-day year.
A)41.02 percent
B)39.62 percent
C)37.80 percent
D)37.56 percent
E)39.40 percent

Question

Quizplus · Accepted Answer

The cost of credit calculation involves finding the effective annual rate (EAR) of the discount offered (2%) and subtracting it from the nominal annual rate (365/(30-7)=15.44%)

EAR = (1 + (Nominal rate/m) )^m - 1 
EAR = (1 + (0.02/1)) ^ 365/23 - 1 
EAR = 0.4160 or 41.60%

Cost of credit = EAR - Nominal rate = 41.60% - 15.44% = 26.16%

Therefore, the cost of credit to the customer if they pay on the last day of the credit period is 26.16%, or 37.80% rounded to the nearest whole percentage.

The correct answer choice is C.

Lemoyne Mailed an Invoice Today in the Amount of $1,268