A merchant receives an invoice for $8000 with terms 2/10,n/50.What is the maximum interest rate that the merchant could borrow money at to take advantage of the discount?
A)18.62%
B)18.25%
C)14.90%
D)14.60%

Question

Quizplus · Accepted Answer

The discount offered is 2% of $8000, which equals $160. If the merchant pays within 10 days, they save $160, but if they wait until the 50th day, they have to pay the full $8000. The difference in time is 40 days (50-10). To find the annual interest rate, we calculate the rate that would make borrowing $7840 (the amount after discount) to pay off the invoice early equivalent to paying $8000 in 40 days. The formula for this is (Discount / (Invoice amount - Discount)) * (365 / Days difference). Plugging in the numbers: (160 / (8000 - 160)) * (365 / 40) = 0.1862 or 18.62%.

A Merchant Receives an Invoice for $8000 with Terms 2/10,n/50