A material supplier offers a 2% discount for payment within 10 days, otherwise payment is due in 30 days (2/10 net 30). What is the annual interest rate equivalent of this discount?
Correct Answer
D) 37.2%
The formula is: (Discount % ÷ (100% - Discount %)) × (365 ÷ (Payment period - Discount period)). (2 ÷ 98) × (365 ÷ 20) = 0.0204 × 18.25 = 37.2% annual rate.
Why This Is the Correct Answer
Option C (37.2%) is correct because it uses the proper formula for calculating the annual interest rate equivalent of early payment discounts. The calculation accounts for both the effective interest rate per period (2% discount on 98% payment) and annualizes it based on the 20-day difference between discount and net payment periods. This formula properly reflects the true cost of not taking the discount.
Why the Other Options Are Wrong
Option A: 36.5%
Option D (48.7%) is incorrect because it likely uses an improper formula, possibly dividing the discount percentage by the full 100% instead of the net payment amount (100% - discount%).
Option B: 48.7%
Option B (36.5%) is incorrect because it probably uses 360 days instead of 365 days in the annualization factor, which would give (2/98) × (360/20) = 36.7%, close but not exact to this option.
Memory Technique
Remember 'DEAN': Discount over (100-Discount) × 365 over (Net days - Discount days). The denominator is always the amount you actually pay (98%), not the full amount (100%).
Reference Hint
Look up 'Trade Credit Terms' or 'Early Payment Discounts' in business finance or construction accounting sections of reference materials.
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