Equivalent annual interest rate percentage

Miss DazyMiss Dazy Feels At HomePosts: 34Registered
This area always trips me up, i would be grateful for any help.

Smith indutries offer debtor terms of 75 days and plan to offer 4% discount for settlement in 10 days.

I am asked to find the Equivalent annual interest rate percentage.

Is there a calculation thats easy to remember for this?

thanks in advance

Comments

  • sdvsdv Experienced Mentor Posts: 585Registered
    Miss Dazy wrote: »
    This area always trips me up, i would be grateful for any help.

    Smith indutries offer debtor terms of 75 days and plan to offer 4% discount for settlement in 10 days.

    I am asked to find the Equivalent annual interest rate percentage.

    Is there a calculation thats easy to remember for this?

    thanks in advance

    This is a subject with a lot of contention on this website. search for it and you will find the exchange of posts hilarious.

    No doubt for what I am about to do, it is likely to arouse a lot of passion

    If you want to be precise, there is a formula to work out. No doubt some will post it here and fully explain it

    but for a rough idea; this is what I would do. The answer will not be materially different from the precise answer

    say the debt is £1000

    to get paid early you give a discount of 4% = £40

    £40 is the cost for 65days (75 less 10)

    annual cost therefore would be £40/65 x 365 =£225

    to work out annual percentage cost = £225/(1000-40) x100 = 23.44%
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