Final answer:
The effective annual percentage cost of funds for Affleck Inc. forgoing a 2/5 discount and delaying payment to 65 days is approximately 12.81%. This number is derived using the EAR formula and represents the cost of essentially borrowing money by not taking the trade discount offered.
Step-by-step explanation:
The student is asking about the effective annual percentage cost of funds raised by forgoing a discount on payment terms. To calculate this, we need to determine the cost of not taking the discount and then annualize that cost to get the annual percentage rate. The terms given are 2/5, net 15, with a possibility to delay payment out to 65 days.
Here's the calculation:
- The discount for payment within 5 days is 2%, which means paying on day 5 would cost Affleck Inc. 98% of the invoice amount.
- Forgoing this discount and paying on day 65 instead means paying 100% of the invoice amount.
- The difference, therefore, is effectively a 2% financing charge over 60 days (65 days minus 5 days).
- To annualize this percentage cost, we use the formula for the effective annual rate (EAR): EAR = (1 + i/n)^n - 1, where i is the period interest rate, and n is the number of periods.
- In this context, i is 2% for 60 days. The number of periods n can be found by dividing 365 by the number of days funds are used, which is 365/60.
- So EAR would be calculated as (1 + 0.02/(365/60))^(365/60) - 1.
After calculating, the EAR turns out to be approximately 12.81%. Hence, the correct answer is option e. Forgoing the discount in order to delay payment for supplies would have an effective annual cost of approximately 12.81%.