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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 21.1. 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 of not taking the discount is calculated using the formula: [(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%.

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