Fundamentals of Financial Management, Third Edition

SOLVED NUMERICAL PROBLEMS

1. Find out the effective annual interest rate if sale is made on a credit term of 2/10 net 60 and the payment is not made within 10 days.

   Solution

   1. As per the simple interest rate method mentioned in Eq. 12.1,

      Effective Annual Interest Rate = (2%/98%) × 365/50 = 14.90%

   2. As per the compound interest rate method mentioned in Eq. 12.2,

      Effective Annual Interest Rate = {1 + (0.02/0.98)}^365/50 – 1 = 0.1589 = 15.89%

2. Company A buys components from Company B on credit terms of 2/10 net 35. In a subsequent deal, the former requests the latter to raise the discount percentage to 3 without any change in the credit period. Company B raises the discount to 3% and also changes the credit period, as a result of which the cost of not ...