XYZ Company has credit terms of 2/15 net 45.Customers should take the discount and pay in 15 days if they CANNOT earn more than ________ (EAR)on their investments.
A)17.81%
B)27.86%
C)24.83%
D)16.55%

Question

Quizplus · Accepted Answer

To calculate the EAR, we will first find the cost of not taking the discount (which means paying in 45 days instead of 15 days).
The cost of not taking the discount = 2% discount lost + (45-15) days of extra credit period
= 2% + (30/365) = 2.082%
To find the EAR, we will use the following formula:
(1+EAR) = (1+periodic rate)^n
Here, the periodic rate = 2.082%/15 = 0.1388%
n = 365/15 = 24.3333
(1+EAR) = (1+0.1388%)^24.3333
(1+EAR) = 1.2786
EAR = 27.86%
Therefore, if customers can earn more than 27.86% on their investments, they should not take the discount and pay in 45 days. Otherwise, taking the discount and paying in 15 days would be a better option.

XYZ Company Has Credit Terms of 2/15 Net 45