Question

Your firm purchases goods from its supplier on terms of 2.4 divided by 15 comma net 30. a. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 30?? b. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 40?? Round to two decimal places.

Answer 1

Answer a.

Discount Rate = 2.4%
Discount Period = 15 days
Payment Period = 30 days

Effective Annual Cost = [1 + Discount Rate/(100%-Discount Rate)]^[365 / (Payment Period-Discount Period)] - 1
Effective Annual Cost = [1 + 0.024/0.976]^[365 / (30-15)] - 1
Effective Annual Cost = 1.0246^24.3333 - 1
Effective Annual Cost = 1.8064 - 1
Effective Annual Cost = 0.8064
Effective Annual Cost = 80.64%

Answer b.

Discount Rate = 2.4%
Discount Period = 15 days
Payment Period = 40 days

Effective Annual Cost = [1 + Discount Rate/(100%-Discount Rate)]^[365 / (Payment Period-Discount Period)] - 1
Effective Annual Cost = [1 + 0.024/0.976]^[365 / (40-15)] - 1
Effective Annual Cost = 1.0246^14.60 - 1
Effective Annual Cost = 1.4259 - 1
Effective Annual Cost = 0.4259
Effective Annual Cost = 42.59%