Pets Sore Inc. sells on terms of 1/10, net 75. What is the effective annual cost of trade credit under these terms? Use a 365-day year.
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Given - 1/10 net 75 and
days year to be considered
It means, take 1% discount and pay within 10 days or pay in full within 75 days
Step 1: 365/(75-10) = 5.615
Step 2: 1%/(100%-1%) = 0.0101
Step3: Effective annual rate = 5.615 * 0.0101 = 0.0567 =
Hi, thanks for the response. However, my professor came up with 5.81.
Hi, I have rechecked the solution and to best of my knowledge with 365 days and 1/10 net 75 values the answer for effective annual rate is 5.67%.
The formula for the same is,
Effective interest rate = (Discount%/(1-Discount%)) * (365/(full payment days - discount days))
discount % = 1%
full payment days = 75
discount days = 10
The answer comes at 5.67% only.
no problem, I figured it out
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