Question

Pag Inc., is a clothing retailer and it has terms from one of its vendors of 1/10 n/30. Compute the equivalent annual rate of return that Pag earns by always paying its bills within the discount period.

A) 36.5%
B) 3.65%
C) 30%
D) 3%"

Answer 1

The equivalent annual rate of return that Pag Inc. earns by paying early, based on a 1% discount with 1/10 n/30 terms, is approximately 18.3%, which does not match any of the provided multiple-choice options.

Step-by-step explanation:

The student has asked how to compute the equivalent annual rate of return that Pag Inc. earns by always paying its bills within the discount period, given terms from a vendor of 1/10 n/30. This means the company can pay within 10 days and receive a 1% discount, or pay the full amount within 30 days. To calculate the annual rate of return, first determine the discount period (20 days), which is the difference between the early payment and the full payment period (30-10 days). The formula to compute the equivalent annual rate is:

Equivalent Annual Rate = [(1 + (Discount / (1 - Discount))]^ (365 / Discount Period) - 1

Plugging in the numbers:

Equivalent Annual Rate = [(1 + (0.01 / (1 - 0.01))]^ (365 / 20) - 1

Equivalent Annual Rate = (1.0101)^18.25 - 1

Equivalent Annual Rate ≈ 0.183 or 18.3%

However, none of the provided options (A) 36.5%, (B) 3.65%, (C) 30%, or (D) 3%, match the calculated equivalent annual rate. Thus, the student may need to re-check the options provided or the calculation method.