Instruction 19.1: Use the information to answer the following question(s).
Sunny Manufacturing 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 Sunny Manufacturing is available at an annual rate of 9.6%. Sunny Manufacturing has just purchased $400,000 of plastic chips from Sun Chemical.
-Refer to Instruction 19.1. 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%.