A firm offers terms of 1410 net 30 What effective annual int

A firm offers terms of 1.4/10, net 30.

What effective annual interest rate does the firm earn when a customer does not take the discount?(Use 365 days a year. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What effective annual interest rate does the firm earn if the terms are changed to 2.4/10, net 30, and the customer does not take the discount? (Use 365 days a year. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Solution

a. effective interest calculation:

first let us calculate the interest for (30 days full period - 10 days discount period)

=> 20 days.

interest = 1.4 / (100-1.4) * 100

=>1.4/98.6 * 100

=>1.41988%.

=>0.0141988

this interest is for 20 days.

the effective annnual rate will be = [( 1 + rate for 20 days) * 365 days / 20 ] - 1

=> [(1.0141988)*365/20] - 1

=>18.5091281 - 1

=>17.5091281

=>17.51%.

Effective annual interest rate = 17.51%

b.if terms are 2.4/10 net 30.

interest for (30 -10 )=>20 days

is 2.4 / (100-2.4) *100

=>2.45901%.

=>0.0245901

effective annual interest rate will be = [[1+0.0245901]*365 /20] - 1

=>18.698769 - 1

=>17.70%...(rounded to two decimals).