A buyer failed to take advantage of the vendor's credit terms of 2/15, n/45, but instead paid the invoice in full at the end of 60 days. By not taking advantage of the cash discount, the buyer lost the equivalent of ____________ annual interest on the amount of the purchase.
A) 12.2%
B) 16.2%
C) 18.9%
D) 24.3%
E) 24.5%

Question

Quizplus · Accepted Answer

The net payment period is 45 days, and the buyer paid at the end of 60 days = 15 days beyond the net period. Therefore, the equivalent annual interest rate is:

Discount %/(100%-discount%) × (365/net payment period - discount period)

2/(100-2) × (365/45-15) = 1.217% per 15 days
Annual Interest = (1+0.01217)^24 - 1 = 24.28%

Therefore, the equivalent of annual interest lost is 24.28%. Rounded to the nearest tenth of a percent, that is 24.3%.

A Buyer Failed to Take Advantage of the Vendor's Credit