Answer (D) is correct . The annualized effective rate on credit terms is derived using this formula: ? The effective rate on terms of 2/15, net 45 can thus be calculated as follows: Effective rate = [2% ÷ (100% – 2%)] × [360 days ÷ (45 days – 15 days)] = (2% ÷ 98%) × (360 days ÷ 30 days) = 2.0408% × 12 = 24.49%
Answer (A) is incorrect because The 2% savings is for 30 days only; the annualized interest rate paid for receiving the money early must be calculated.
Answer (B) is incorrect because This percentage results from using the entire payment period in the denominator of the days fraction.
Answer (C) is incorrect because This percentage results from using the discount period in the denominator of the days fraction and from failing to subtract the discount percentage in the denominator of the percentage fraction.
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