What is the effective annual cost of credit terms of 3/15 net 30,if the firm stretches the accounts payable to 60 days?
A)1.7%
B)3.35%
C)12.65%
D)28.03%
E)17.42%

Question

Quizplus · Accepted Answer

First, we need to calculate the cost of not taking the discount:
Effective Annual Rate = (1+(Discount % / (1- Discount %)))^ (365 / (Days Payable - Discount Period))-1
Effective Annual Rate = (1+(3% / (1-3%)))^ (365 / (60-15)) - 1
Effective Annual Rate = 28.03%

Therefore, the effective annual cost of credit terms of 3/15 net 30, if the firm stretches the accounts payable to 60 days is 28.03%.

Option D is the correct answer.

What Is the Effective Annual Cost of Credit Terms of 3/15