A buyer failed to take advantage of the vendor's credit terms of 2/15, n/45, but instead paid the invoice in full at the end of 45 days. By not taking advantage of the cash discount, the equivalent annual interest lost on the amount of the purchase is:
A) 24.5%
B) 16.2%
C) 24.3%
D) 18.9%
E) 12.2%

Question

Quizplus · Accepted Answer

The credit terms of 2/15, n/45 mean that the buyer can take a 2% discount if the payment is made within 15 days, otherwise, the full amount is due in 45 days.

If the buyer chooses not to take the discount, they are essentially borrowing the money for an additional 30 days (from day 16 to day 45).

To calculate the equivalent annual interest rate, we can use the following formula:

Equivalent annual interest rate = (Discount % / (100% - Discount %)) x (365 / (Days credit is extended - Discount period))

Plugging in the values, we get:

Equivalent annual interest rate = (2% / (100% - 2%)) x (365 / (45 - 15))
= 2.05% x (365 / 30)
= 24.33%

Therefore, the equivalent annual interest lost on the amount of the purchase is 24.33%. The closest option is C.

A Buyer Failed to Take Advantage of the Vendor's Credit