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Your firm is offered credit terms of 2/20, net 65. What is the effective annual interest...

Your firm is offered credit terms of 2/20, net 65. What is the effective annual interest rate on this arrangement? Assume 365 days in each year. Multiple Choice 14.60% 15.41% 17.81% 19.17% 16.22%

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Answer #1
The formula to calculate the effective annual interest rate offering through credit terms.
Effective Annual Interest rate = [Discount %/(1-Discount %)] x [365/(Full allowed payment days - Discount days)]
Effective Annual Interest rate = 2%/(1-0.02) x [365/(65 - 20)]
Effective Annual Interest rate = 0.020408 x 8.11
Effective Annual Interest rate = 0.1655
Effective Annual Interest rate = 16.55%
As the nearest option is 16.22%, the answer is 16.22%
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