\begin{tabular}{l}\begin{tabular}{|l|l|l|l|l|l|l|}\hline a firm offers terms of $$ 1 / 25 $$, net 40 & & & \ \hline\end{tabular} \ what effective annual interest rate does the firm earn if the credit period is increased to 60 ? \ \hline\end{tabular}

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The seller’s original terms state “1/25, net 40.” This means that if the customer pays within 25 days, they get a 1% discount; if they do not take the discount, they must pay the full invoice at 40 days. Now suppose the seller extends the credit period to 60 days. In effect, a customer who foregoes the 1% discount now holds the firm’s money for an extra 60 – 25 = 35 days. In doing so, the customer is “paying” an extra cost for the convenience of not having to pay early, and that extra cost can be translated into an effective interest rate.

The cost of forgoing the discount is calculated on the basis of the “discount sacrifice.” Namely, the customer gives up a 1% discount on a 99% payment. This extra cost is

Discount cost per period = 1% / (100% – 1%) = 0.01/0.99 ≈ 0.010101.

This 0.010101 is the extra cost for deferring payment by 35 days. To convert this periodic cost to an effective annual interest rate, we assume that such 35‐day periods occur 365/35 times per year. To compound the cost over the year we use the formula

Effective annual rate = (1 + (discount/ (1 – discount)))^(365/35) – 1.

Plugging in the numbers:

Effective annual rate = (1 + 0.01/0.99)^(365/35) – 1
             = (1.010101)^(10.4286) – 1.

Now, taking logarithms:
  ln(1.010101) ≈ 0.01005,
  10.4286 × 0.01005 ≈ 0.1048,
  and exponentiating: exp(0.1048) ≈ 1.1106.

Thus, the effective annual rate is about
  1.1106 – 1 = 0.1106,
or approximately 11.1%.

So, if the seller increases the credit period to 60 days, the effective annual interest rate on the amount “financed” by offering the discount is about 11% per year.
If the credit period is increased to 60 days, the firm earns an effective annual interest rate of approximately 11%.

a firm offers terms of , net 40

what effective annual interest rate does the firm earn if the credit period is increased to 60 ?

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a firm offers terms of , net 40 what effective annual interest rate does the firm earn if the credit period is increased to 60 ?