Question

Tsalanang Tours purchased inventory to the value of R70 000. The company buy in terms of 1/10, net 20. It does not take discounts and it typically pays 30 days after the invoice date. What is the effective annual rate if the company paid the full amount in 30 days? Assume a 365-day year.
1. 12%
2. 13%
3. 15%
4. 20%

Answer 1

Ans ) 20%

Nominal annual rate if the company paid the full amount in 30 days = dicount%/(1- Discount %) x (365/Actual days-discount days)

= 1%/(1-1%) x 365/(30-10)

= 0.01/(1-0.01) x 365/20

= 0.01/0.99 x 18.25

= 0.0101 x 18.25

= 0.1843

= 18.43%

Effective annual rate = (1+Nominal rate/n)^n - 1

n = compounding period = 365/20 = 18.25

Thus Effective annual rate = (1+18.43%/18.25)^18.25 - 1

= (1+ 1.00986%)^18.25 - 1

= 1.0100986^18.25 - 1

= 1.20 - 1

= 0.20

i.e 20%