Haverly offers its customers an effective interest rate of 24.33% on its terms of sale. They offer a 1% discount if payment is made within 5 days. Assuming a 365-day year, what terms of sale does Haverly use?
A)1/5, net 30
B)1/5, net 20
C)1/5, net 15
D)1/5, net 10

Question

Quizplus · Accepted Answer

To find the terms of sale, we need to start with the effective interest rate and calculate the discount period.

Effective Interest Rate = (1 - Discount %) x (365 / (Full payment days - Discount days)) x 100%

Let's plug in the given values:

24.33% = (1 - 1%) x (365 / (Full payment days - 5)) x 100%

Simplifying the equation, we get:

0.2433 = 0.99 x (365 / (Full payment days - 5))

Full payment days - 5 = 365 / (0.2433 / 0.99)
Full payment days - 5 = 80.98
Full payment days = 86.98

So the terms of sale are 1/5, net 20.

Haverly Offers Its Customers an Effective Interest Rate of 24