Your firm purchases goods from its supplier with a discount of 1%,and a credit period of 20 days.If the effective annual cost of forgoing the discount is 27.71%,what is the length of the discount period?

Question

Quizplus · Accepted Answer

The length of the discount period is the difference between the credit period and the time you have to take advantage of the discount. Given a credit period of 20 days and an effective annual cost of forgoing the discount of 27.71%, which indicates the discount is not taken, the length of the discount period is the time before the end of the credit period. Since the effective annual cost is calculated based on not taking the discount, the actual discount period must be very short, making 5 days the correct choice, as it is the shortest period listed and implies the discount is available only for the first 5 days of the 20-day credit period.

Your Firm Purchases Goods from Its Supplier with a Discount