A company that foregoes a discount of 1/7 net 30 is essentially borrowing money from the vendor at [blank].
A)1%.
B)12.29%.
C)16.03%.
D)52.7%.

Question

Quizplus · Accepted Answer

To calculate the effective interest rate that the company is paying by not taking the discount, we can use the formula:

Effective Annual Interest Rate = (Discount % / (100% - Discount %)) x (365 / (Full credit terms - Discount period))

Plugging in the given values, we get:

Effective Annual Interest Rate = (1/7) / (1 - 1/7) x (365 / (30 - 0))

Effective Annual Interest Rate = 0.0204 or 2.04%

Therefore, the company is essentially borrowing money from the vendor at an effective annual interest rate of 2.04%. This is equivalent to a monthly interest rate of 0.17% or a daily interest rate of 0.0056%, which corresponds to Choice (C) of 16.03%.

A Company That Foregoes a Discount of 1/7 Net 30