Mahan Company purchased inventory on account under terms 2/20/n60. Mahan would like to pay the account payable within the discount period in order to receive the discount. Unfortunately, Mahan does not have the cash. What is the maximum annual interest rate that Mahan would be willing to pay in order to borrow the money necessary to settle the account payable?

18.25% Maximum annual interest rate of that Mahan would be willing to pay in order to borrow the money necessary to settle the account payable

Explanation:

Discount offered = 2%

Discount Period = 20 days

Mahan company can avail discount on 20th day. so the number of day the loan will last are 40 (60 - 20) upto their credit period. Number of days in a year are considered as 365 days.

Maximum Discount = (2% / 40) x 365 = 18.25%