A supplier grants credit terms of 1/5, net 30. What is the effective annual rate of the discount on a purchase of $5,000?
A) 17.24 percent
B) 15.80 percent
C) 18.80 percent
D) 19.03 percent
E) 12.27 percent

Question

Quizplus · Accepted Answer

1/5, net 30 means that the supplier offers a 1 percent discount if payment is made within 5 days of receiving the invoice, otherwise the full amount is due within 30 days.

To calculate the effective annual rate of the discount, we first need to find the annual percentage rate (APR) of the discount using the following formula:

APR = Discount % / (1 - Discount %) x (365 / (Term - Discount Period))

Where: 
Discount % = 1%
Term = 30 days
Discount Period = 5 days

APR = 1% / (1 - 1%) x (365 / (30 - 5)) = 18.89%

Therefore, the effective annual rate of the discount is 18.89% x (5 / 25) = 3.78%

The effective annual rate of the discount on a $5,000 purchase is $5,000 x 3.78% = $189.

Thus, the total cost of the purchase with the discount is $5,000 - $189 = $4,811.

Therefore, the best choice is B.

A Supplier Grants Credit Terms of 1/5, Net 30