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Annual Rate of Interest and Cash Discount Terms

One very interesting calculation [I think it somewhere in the reading, if not you can get it with a Google] is the annual rate of interest which an organization can earn if it takes advantage of cash discount terms like 2/10 n30. The discount to be take here is 2% but that is not an annual rate, and interest rates are almost always expressed as an annual rate or APR as you see it in the TV ads.

1.) The question is what is the APR that you can earn by taking advantage of the 2% cash discount that is offered by your suppliers to pay within ten days?

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COST OF FORGOING 2% CASH DISCOUNT if payment Within 10 days rather than paying at 30 days

COST OF TRADE CREDIT TO THE CUSTOMER

R= C(365)/D(100-C)=37.25%
C=CASH DISCOUNT= 2%
D= NO. OF EXTRA DAYS THAT ...

Solution Summary

This solution shows step-by-step calculations of the cost of trade credit to the customer and determines value made by taking advantage of 2% discount offered by our suppliers to pay within ten days. References are included.

$2.19