A company is offering you terms for payment on an invoice of

A company is offering you terms for payment on an invoice of $25,000 of \"Discount 1% in 10 days Net 30 days.\" This means that you can either pay 96% of the amount due in 10 days or pay the entire amount in 30 days. What is the effective rate per year compounded yearly that you will be able to earn on the amount if you take the discount?

20.13%

22.62%

35.14%

14.32%

Solution

Select - A .......... 20.13%

Amount = 25000 and discount = 1%............ so amount of discount = 25000 * 1% = 250

Now you can pay 24750 on 10th day or else, 25000 on 30th day. It means that $250 is the cost of 24750 for 20 days.

Rate of Interest = 250/24750 = 0.0101010101 for every 20 days

Effective annual rate = ( 1 + r ) ⁿ - 1 = (1.0101010101)^18.25 - 1 = 0.2013 or 20.13%

Here n = 365 days / 20 days