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17 February, 07:41

Rock bottom purchases its inventory on trade credit with terms of 2/10 net 45. If the firm waits the full 45 days to pay for the inventory, what is the effective annual rate of interest is the firm paying for its trade credit

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  1. 17 February, 07:55
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    The effective annual rate of interest is 23.45%

    Explanation:

    Effective annual rate of interest = (1+annual interest) ^365/t-1

    Annual interest = discount rate/100%-discount rate

    discount rate here is 2%

    annual interest=2/100-2

    =2.04%

    T is the difference between the discount period of 10 days and credit period of 45 days

    45-10=35 days

    Effective annual rate of interest = (1+2.04%) ^ (365/35) - 1

    = (1.0204^10.42857143) - 1

    = 1.2345 - 1

    =0.2345

    =23.45%
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