A firm offers terms of 1/25, net 40. a. What effective annual interest rate does the firm earn when a customer does not take the discount

27.70%

Explanation:

The following can be deduced from the question:

Discount = 1%

We then calculate the interest rate based on the discount given in the question. This will be:

= 1%/(100% -1%)

= 1%/99%

= 0.01/0.99

= 0.0101

= 1.01%

Number of days given in respect for the interest = 40 - 25 = 15days

The effective annual interest will be calculated as:

= ((1 + int rate)^m) -1

= ((1 + 1.01%)^(365/15)) - 1

= (1.01)^(24.3) - 1

= 0.27702

= 27.70%

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