Question

A company is offering you terms for payment on an invoice of $15,000 of "Discount 6% in 10 days Net 90 days." This means that you can either pay 94% of the amount due in 10 days or pay the entire amount in 90 days. What is the effective rate per year compounded yearly that you will be able to earn on the amount if you take the discount?

32.6%

74.3%

45.4%

27.2%

Answer 1

Sol :

Given,

Discount rate offered is 6% in 10 days net 90 days.

Effective rate per year you able to earn on the amount paid if you take the discount will be as follows,

Effective cost of trade credit = (1 + discount % / 1 – discount %)^(365/days past discount) – 1

Effective cost of trade credit = (1 + 6%/1 - 6%)^(365/90 -10) -1

Effective cost of trade credit = (1 + 0.6/1 - 0.6)^(365/80) -1

Effective cost of trade credit = 1.0638^(4.5625) -1

Effective cost of trade credit = 32.6%

Therefore effective rate per year you able to earn on the amount paid if you take the discount will be 32.6%