Question

1. Sam’s Supply Hut offers credit terms to all of its customers of 1.5/10 net 30. The company only sells boxes of frozen specialty caviar. Because of the difficulty in obtaining caviar, customers are limited to only one carton per order and the cost per carton is $25,000.

a) What is the cash discount price?

b) What is the implicit interest rate are Sam’s customers paying if they do not take advantage of the cash discount?

c) What is the APR (the annual percentage rate) that customers are paying if they do not take advantage of the cash discount?

Answer 1

Solution)
A) 1.5/10 net 30 is a way of providing cash discounts on purchases. It means that if the bill is paid within 10 days, there is a 1.5% discount. Otherwise, the total amount is due within 30 days.
Invoivce Amount = $ 25,000
Cash Discount = $ 25000*0.015 = $ 375
Price after Cash discount = $ 24,625
B) Implied interest rate = Discount % ÷ (100-Discount %) x (360 ÷ (Full Allowed Payment Days – Discount Days))
= 1.5%/(100-1.5 %)*(365/(30-10)
= 27.791%
C) Annual Rate of Interest is also same as implied interest rate that is 27.791%