Your firm purchases goods from its supplier on terms of 2/10, net 40. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to:

Question

Quizplus · Accepted Answer

To calculate the effective annual cost, we need to find the effective interest rate for not taking the discount and stretching the accounts payable to 60 days.

First, we need to find the cost of not taking the discount. The cost of not taking the discount can be found using the following formula:

(Discount % ÷ (100% - Discount %)) x (365 ÷ (Number of days credit - Discount period))

Plugging in the numbers, we get:

(2% ÷ (100% - 2%)) x (365 ÷ (60 - 10)) = 14.08%

So, the cost of not taking the discount is 14.08%.

Next, we need to find the effective interest rate. The effective interest rate can be found using the following formula:

((1 + Cost of not taking discount)^(365 ÷ Number of days in period)) - 1

Plugging in the numbers, we get:

((1 + 0.1408)^(365 ÷ 60)) - 1 = 15.88%

So, the effective annual cost to the firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to 15.9%.

Therefore, the best choice is B.

Your Firm Purchases Goods from Its Supplier on Terms of 2/10