Question

Your primary supplier offers you the following terms of credit:2/15 net 60What is the effective Annual Percentage Rate of interest if you forego the early payment discount?

Answer 1

When early payment discount is foregone, following formula is used to calculate effective annual rate.

Assuming Initial Price = 100

Discount = 2

Last Payment Days = 60

Last Payment Days with discount = 15

Extra Credit Days = Last Payment Days - Last Payment Days with discount = 60 - 15 days = 45 days

Now, putting all the values in above formula, we get

Effective Annual Rate = 0.165444 = 16.54%