If a vendor offers a firm 2/10,net 30,and the firm doesn't take it,the firm is paying an interest rate of over 36% on an annual basis.

Question

Quizplus · Accepted Answer

The calculation of the effective annual interest rate can be done using the following formula:
Effective Annual Interest Rate = (1 + (Discount % / (100 - Discount %))) ^ (365 / (Term of Credit - Discount Period)) - 1

For the given terms, the discount % is 2%, the term of credit is 30 days, and the discount period is 10 days. By putting the values in the formula, we get:

Effective Annual Interest Rate = (1 + (2 / (100 - 2))) ^ (365 / (30 - 10)) - 1
                              = 37.24%

Therefore, if the firm doesn't take the offered discount, they are effectively paying an interest rate of 37.24% on an annual basis.

If a Vendor Offers a Firm 2/10,net 30,and the Firm