Your firm purchases goods from its supplier with a discount of 2%,and a credit period of 30 days.If the effective annual cost of forgoing the discount is 63.49%,what is the length of the discount period?

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Quizplus · Accepted Answer

The effective annual cost of forgoing the discount can be calculated using the formula: $$ \text{Effective Annual Rate} = \left(1 + \frac{\text{Discount}}{1 - \text{Discount}}\right)^{\frac{365}{\text{Days credit is taken} - \text{Discount period}}} - 1 $$ Given the effective annual rate is 63.49% and the discount is 2%, we can set up the equation with the unknown being the length of the discount period. Since the credit period is 30 days and we know the annual rate, we solve for the discount period, which leads to the conclusion that the discount period is 15 days to match the given effective annual cost of forgoing the discount.

Your Firm Purchases Goods from Its Supplier with a Discount