On January 1, 2014, Shaffer Co. purchased inventory for $1,000 cash with credit terms of 2/10, n/30. If Shaffer does not pay within the discount period, what is the effective annual interest rate?

Question

Quizplus · Accepted Answer

The discount of 2% for paying within 10 days implies an interest cost of 2% for the remaining 20 days if not taken. The effective annual interest rate is calculated as (1 + 0.02)^(365/20) - 1, which approximates to 36.5%.