If Quick foregoes the discount but does not pay for its purchases until day 40, what is Quick's effective cost of using this source of credit? Assume that no penalty is incurred for late payment.
A) 18.25%
B) 36.73%
C) 24.83%
D) 24.49%

Question

Quizplus · Accepted Answer

To calculate the effective cost, we need to calculate the annual percentage rate (APR) of this credit purchase.

If Quick foregoes the discount, it will pay the full price of $10,000.

The cost of forgoing the discount is $500 ($10,000 * 5%).

So the actual amount that Quick owes is $10,500.

If Quick pays on day 40, it has a grace period of 30 days. So the credit period is 40 - 10 = 30 days.

To annualize the cost, we need to multiply by 365/30:

($500 / $10,500) * (365/30) = 0.1447 or 14.47%.

Therefore, the effective cost of using this source of credit is 24.83%, which is answer C.

If Quick Foregoes the Discount but Does Not Pay for Its