Page 124 - CalcBus_Flipbook

13-10 Merchandising CH 13]

Solution algorithm: $1,200 net amount of invoice
− 36 cash discount (3% of $1,200)
$1,164 payment in full

With your hand held calculator and using the % key:

Cl/C 1200 − 3 % —> 1164, means $1,164.00

Though in our example the discount stated is 3%, it can be considered an interest rate.
As such, it has a different effective rate which the business owner, or borrower, need to
consider when it comes to what they are actually receiving, and making payments in a
Effective annual timely manner with the purpose of taking advantage of the cash discount.
interest rate: Is the
usage rate that a The following table contains a number of standard accounting payment terms, what they
borrower actually mean, and the effective annual interest rate being offered (if any).
pays on a loan or
credit received. It
can also be Effective
considered the
market rate of Credit Annual
interest or the yield Terms Explanation Interest
to maturity. This rate
may vary from the Net 10 Pay in 10 days None
rate stated on the
invoice. Net 30 Pay in 30 days None
Net EOM 10 Pay within 10 days of month-end None
1/10 Net 30 Take 1% discount if paid in 10 days, otherwise pay in 30 days 18.2%
2/10 Net 30 Take 2% discount if paid in 10 days, otherwise pay in 30 days 36.7%
3/10 Net 30 Take 3% discount if paid in 10 days, otherwise pay in 30 days 55.7%
1/10 Net 60 Take 1% discount if paid in 10 days, otherwise pay in 60 days 7.3%
2/10 Net 60 Take 2% discount if paid in 10 days, otherwise pay in 60 days 14.7%
3/10 Net 60 Take 3% discount if paid in 10 days, otherwise pay in 60 days 22.3%

TABLE 13.1 EFFECTIVE ANNUAL INTEREST RATE TABLE

The effective annual interest rate stated in the preceding table is based on the following
calculation:

NOTE: Always convert % to decimal values.
Discount%
NOTE: This is Numerator (1-Discount%) = Effective annual interest rate

a Compound
fraction 360
(Full allowed payment days – Discount days) Denominator

As a linear equation the Effective annual interest rate =
Discount % / (1-Discount %) / (360/(Full allowed payment days - Discount days))

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