On January 1,2012,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 offered is 2% and if Shaffer Co. does not pay within the discount period, it would have to pay the full amount of $1,000 in 30 days. 
To calculate the effective annual interest rate, we can use the following formula:

Effective annual interest rate = [1 + (Discount % / (100 - Discount %))]^(365/Number of days credit) - 1

For this scenario, the calculation would be: 
Effective annual interest rate = [1 + (2 / (100 - 2))]^(365/20) - 1 
= [1 + (2 / 98)]^18.25 - 1 
= 1.365 - 1 
= 0.365 or 36.5%

Therefore, the effective annual interest rate is 36.5%. The best choice is D.