Question

Required:

a. Calculate the approximate annual rate of return on investment of the following cash discount terms: (Do not round intermediate calculations. Enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1).)

1/5 NET 30= ROI ___%

5/10 NET 60= ROI ___%

1/10 NET 90= ROI ___%

b. Which of these terms, if any, is not likely to be a significant incentive to the customer to pay promptly?

• 1/15, net 30

• 5/10, net 60

• 1/10, net 90

Answer 1

1. 1/5 NET 30

ROI = Discount Rate * 360 / (Difference between credit days)

ROI = 1% * 360 / 25

ROI = 14.40%

2. 5/10 NET 60

ROI = Discount Rate * 360 / (Difference between credit days)

ROI = 5% * 360 / 50

ROI = 36.00%

1/10 NET 90

ROI = Discount Rate * 360 / (Difference between credit days)

ROI = 1% * 360 / 80

ROI = 22.50%

b. Which of these terms, if any, is not likely to be a significant incentive to the customer to pay promptly?

• 1/15, net 30 (because it offers lesser ROI)

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