The effective annual cost of not taking advantage of the 1/10,net 60 terms offered by a supplier is
A) 1.50%.
B) 5.37%.
C) 6.69%.
D) 7.27%.

Question

Quizplus · Accepted Answer

To calculate the effective annual cost of not taking advantage of the 1/10, net 60 terms, we need to consider the cost of financing the purchase for the additional 50 days (60 days - 10 days). Let's assume that the cost of financing is 8%.

First, we calculate the cost of not taking the discount:
- 1/10 discount equals a 10% savings, so the effective cost of the purchase is 90%. 
- The number of 50 day periods in a year is 365/50 = 7.3. 
- So, the effective annual cost of not taking the discount is (1.00/0.90)^(365/50) - 1, which equals 7.27%.

Therefore, the best choice is D.

The Effective Annual Cost of Not Taking Advantage of the 1/10,net