What is the effective cost of credit terms of 2/10,net 30 if the firm stretches the accounts payable to 45 days?
A)49.76%
B)36.12%
C)23.37%
D)44.59%

Question

Quizplus · Accepted Answer

The effective cost of credit can be calculated using the formula:
[(1 + discount %) / (1 - discount %) ^ (365 / (number of days credit is extended - discount period))] - 1

Plugging in the given values, we get:
[(1 + 0.02) / (1 - 0.02) ^ (365/ (45 - 10))] - 1
= 0.237 = 23.7%

Therefore, the effective cost of credit is 23.7%. The best choice is C, as it is the only option that matches this value.

What Is the Effective Cost of Credit Terms of 2/10,net