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)3.35%
B)28.03%
C)12.65%
D)1.7%

Question

Quizplus · Accepted Answer

The credit terms 3/15 net 30 means a 3% discount is available if payment is made within 15 days, and the net amount is due in 30 days. 
If the firm stretches the accounts payable to 60 days, they will not be able to take the 3% discount and will have to pay the full amount. 
The effective annual cost of credit can be calculated as [(1+Discount %)/(1-Discount %)^(360/Net Days)]-1. 
So, the effective annual cost of credit for this scenario would be [(1+0.03)/(1-0.03)^(360/60)]-1 = 0.2803 or 28.03%. 
Therefore, the best choice is B.

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