question archive If a firm is given a trade credit terms of 2/15, net 30, then the cost to the firm failing to take the discount is (use 360 days) * Cm Format: 11

If a firm is given a trade credit terms of 2/15, net 30, then the cost to the firm failing to take the discount is (use 360 days) * Cm Format: 11

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If a firm is given a trade credit terms of 2/15, net 30, then the cost to the firm failing to take the discount is
(use 360 days) * Cm Format: 11.11%

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62.40%

Step-by-step explanation

The cost of failing to seize the discount opportunity is an effective annual rate that considers the days past the due date as well as the number of days in one year as denoted by the formula provided  below:

implicit interest rate for foregoing discount=(1+discount rate/1-discount rate)^(360/days past discount) -1

discount rate=2%(2/15 means 2% for making the payment within the first 15 days)

days past discount =credit days-discount days

credit days=30 days

discount days=15 days

days past discount=30-15=15 days

implicit interest rate=(1+2%/1-2%)^(360/15)-1

implicit interest rate=(1+0.02/0.98)^(360/15)-1

implicit interest rate=(1+0.0204081632653061)^(360/15)-1

implicit interest rate=(1.0204081632653061)^(360/15)-1

implicit interest rate=1.6239557204261500-1

implicit interest rate=

62.40%

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