Page 125 - CalcBus_Flipbook

CH 13] Calculating Business 13-11

Example: A seller leaves an invoice with the terms 1.5%/10, n45. Calculate the effective
annual interest rate.

Solution Algorithm A: The solution to fraction equations begins with the denominator and
you work the solution up to the numerator.
Discount%
(1-Discount%) = Effective annual interest rate
360
(Full allowed payment days – Discount days)

1.5%
NOTE: This is ( 1 − 1.5% ) = Effective annual interest rate
a Compound
fraction 360
( 45 – 10 ) 1.5% x 100% = 0.015

0.015 Convert % to Decimals, then x 100%
( 1 − 0.015 ) x 100% = Effective annual interest rate
360
( 45 – 10 ) Subtraction with Parentheses first
You will also begin division. Start at the
bottom 13
0.015
( 1 − 0.015 ) x 100% = Effective annual interest rate
360
( 35 )

0.015 Now division
( 1 − 0.015 ) x 100% = Effective annual interest rate
10.2857 Perform subtraction of 1 - 0.015

0.015 x 100% added as the answer is in %
( 0.985 ) x 100% = Effective annual interest rate
10.2857
0.015 x 100% added as the answer is in %
( 0.985 ) x 100% = Effective annual interest rate
10.2857
Perform division of 0.985 ÷ 10.2857

0.015 x 100% = Effective annual interest rate
NOTE: Simple
fraction 0.09576 Perform division of 0.015 ÷ 0.09576

0.15664 x 100% = Effective annual interest rate
Multiply by 100% to have answer as a %.
15.664% = Effective annual interest rate

— OR —

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