Wyatt Oil purchases goods from its suppliers on terms 3/20 net 40. The effective annual cost to Wyatt if they do not take the discount and pay on day 50 is closest to:
A) 18%
B) 45%
C) 75%
D) 82%
B
Explanation: B) The interest rate per period is $3/$97 = .031. If the firm delays payment until the 50th day, it has use of the funds for 30 days beyond the discount period. There are 365/30 = 12.167 30 day periods in one year. Thus, the effective annual cost is
(1 + .031)12.167 - 1 = .45 or 45.0%
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