If a vendor's invoice states terms of sale of 1/10 net 30, and the buyer fails to take the prompt payment discount, it is effectively borrowing money at an annual rate of:
A)18.25%.
B)1.0%.
C)12%.
D)36.5%.

Question

Quizplus · Accepted Answer

The terms 1/10 net 30 means that a 1% discount is offered if payment is made within 10 days of the invoice date. If the discount is not taken, the full invoice amount is due within 30 days.

To calculate the effective annual rate of borrowing, we can use the following formula:

Effective Annual Rate = (1 + Discount % / (1 - Discount %)) ^ (365 / Number of Days Credit is Extended) - 1

Plugging in the values for this scenario, we get:

Effective Annual Rate = (1 + 0.01 / (1 - 0.01)) ^ (365 / 20) - 1
Effective Annual Rate = 0.183 or 18.3%

Therefore, the buyer is effectively borrowing money at an annual rate of 18.3% if they do not take the prompt payment discount. The closest answer option is A) 18.25%, so that is the correct choice.

If a Vendor's Invoice States Terms of Sale of 1/10