Question

Farwell Company purchased merchandise with an invoice price of $2,000 and credit terms of 1/10, n/30. Assuming a 365 day year, what is the implied annual interest rate inherent in the credit terms?

Answer 1

To calculate the implied annual interest rate inherent in the credit terms, we need to use the simple interest formula and rearrange it to solve for the Rate. Substituting the values, we can calculate the implied annual interest rate to be approximately 2.7%.

Step-by-step explanation:

To calculate the implied annual interest rate inherent in the credit terms, we need to first understand the terms given. The credit terms of 1/10, n/30 mean that the buyer can receive a 1% discount if they pay within 10 days, and the full amount is due within 30 days.

To calculate the implied annual interest rate, we can use the simple interest formula. The formula is: Interest = Principal x Rate x Time. In this case, the Principal is $2000, the interest is $20 (which is 1% of $2000) and the Time is 365 days. We can rearrange the formula to solve for the Rate: Rate = Interest / (Principal x Time). Substituting the values we get: Rate = 20 / (2000 x 365). Calculating this gives us the implied annual interest rate of approximately 0.027 or 2.7%.