What is the effective annual cost of credit terms of 2/20,net 60,if the firm stretches the accounts payable to 80 days?
A)6.4 %
B)13.1%
C)21.1%
D)34.2%
E)41.4%

Question

Quizplus · Accepted Answer

The effective annual cost of credit terms of 2/20, net 60, when stretching the accounts payable to 80 days, is calculated by considering the discount lost for not paying within the discount period. The formula to calculate the effective annual cost (EAC) is: EAC = [1 + (Discount / (1 - Discount))]^(365 / (Days Paid - Discount Period)) - 1. Here, the discount is 2% (0.02), the discount period is 20 days, and the firm pays in 80 days instead of 60. Plugging these values into the formula gives: EAC = [1 + (0.02 / (1 - 0.02))]^(365 / (80 - 20)) - 1, which approximately equals 13.1%.

What Is the Effective Annual Cost of Credit Terms of 2/20,net