Instruction 22.1:
Use the information to answer following question(s).
SureDrip Irrigation Systems Inc. is supplied with plastic chips for their plastic injection molding manufacturing process. Their supplier, Sun Chemical, Inc. offers financing terms of a 2% discount if the accounts payable are paid in 10 days or less with the full balance due in 45 days. Short-term financing available to SureDrip is available at an annual rate of 9.6%. SureDrip has just purchased $400,000 of plastic chips from Sun Chemical.
-Refer to Instruction 22.1. What is the effective annual interest cost of supplier financing offered by Sun Chemical?
A) 7.3%
B) 9.5%
C) 10.4%
D) 22.9%

Question

Quizplus · Accepted Answer

The effective annual interest cost is calculated using the formula for the cost of not taking the discount: [(1 + (Discount % / (1 - Discount %)))^(365 / (Full Payment Due Days - Discount Days))] - 1. Plugging in the values: [(1 + (0.02 / (1 - 0.02)))^(365 / (45 - 10))] - 1 = 22.9%.

Instruction 22.1: Use the Information to Answer Following Question(s)