Question

Kingbird, Inc. purchased merchandise with an invoice price of $3200 and credit terms of 2/9, n/30. Assuming a 360-day year, what is the implied annual interest rate inherent in the credit terms?

Answer 1

80%

Explanation:

Data provided as per the question

Number of days in a year = 360 days

Discount provided = 2%

Total net credit period = 30

The calculation of implied annual interest rate inherent in the credit terms is shown below :-

`Inherent\ in\ the\ credit\ terms\ = (Number\ of\ days\ in\ a\ year)/(Total\ net\ credit\ period\ - Remaining\ days)* 2\%`

`Inherent\ in\ the\ credit\ terms\ = (360)/(30 - (30\ -\ 9))* 2\%`
`Inherent\ in\ the\ credit\ terms\ = (360)/(30 - 21)* 2\%`

`Inherent\ in\ the\ credit\ terms\ = (360)/(\ 9)* 2\%`

`Inherent\ in\ the\ credit\ terms\ = \ 40* 2\%`

`Inherent\ in\ the\ credit\ terms\ = \ 80\%`

Therefore for computing the inherent in the credit terms we simply applied the above formula.