What is the effective annual rate of credit terms of 2/20, net 45?

A) 32.31%
B) 34.31%
C) 36.31%
D) 38.31%
E) 40.31%

Question

What is the effective annual rate of credit terms of 2/20, net 45?A)  32.31%B)  34.31%C)  36.31%D)  38.31%E)  40.31%

Dylan Murphy · Accepted Answer

Final Answer : B, Explanation :  The effective annual rate (EAR) for the given credit terms of 2/20, net 45 can be calculated using the formula for EAR when discounts are involved. The discount here is 2%, which is available if the payment is made within 20 days, otherwise, the full amount is due in 45 days. The period after the discount period until the net due date is 25 days (45-20). The EAR can be calculated as follows:EAR = (1 + (discount rate / (1 - discount rate)))^(365/days past discount) - 1Plugging in the values:EAR = (1 + (0.02 / (1 - 0.02)))^(365/25) - 1EAR ≈ 34.31%Therefore, the correct answer is 34.31%.

What is the effective annual rate of credit terms of 2/20, net 45?

A) 32.31%
B) 34.31%
C) 36.31%
D) 38.31%
E) 40.31%

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