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Hello John,
A supplier offers a 3% discount for payment within 10 days or full payment within 45 days.
Assuming a 360-day year what is the annualised cost of not taking the discount?
A 37.11%
B 36.00%
C 24.74%
D 31.81%1. My only issue in this question is that in the answer it says that :”As the
requirement does not ask for an effective annual rate a simple annual rate can be
calculated to be 31.81% (3/97 × 360/35).”2. What’s the difference between annualised cost and effective annual rate?
Thanks
Suppose there is interest of 5% every 6 months (so twice a year).
The annualised cost would be 2 x 5% = 10%.
The true annual rate (the effective annual rate) would be (1+0.05)^2 – 1 = 0.1025 (or 10.25%)So the effective annual rate for this question will be (1 + 0.03)^(360/35) – 1 = 0.3553 (or 35.53%)
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