To calculate the implied interest rate, we need to determine the discount period and the discount amount offered.
The terms "3/5 net 28" mean that the payment is due in 28 days, with a discount available if paid within a specified period. In this case, the discount period is 5 days.
To forgo the discount and pay on day 28, we take the difference between the discount period (5 days) and the payment period (28 days) to obtain the length of time for which we forgo the discount (23 days).
To calculate the implied interest rate, we divide the amount of the discount forgone by the amount eligible for the discount, and then divide by the forgone period expressed in terms of a year.
Let's assume the amount eligible for the discount is $100. The discount amount would be (3/5) * $100 = $60.
The amount forgone by choosing to pay on day 28 is $60, and the forgone period is 23 days.
To calculate the implied interest rate, we divide the forgone amount by the eligible amount and then divide by the forgone period expressed in terms of a year:
Implied interest rate = ($60 / $100) / (23/365)
Implied interest rate = 0.6 / 0.063
Implied interest rate ≈ 9.52
Therefore, the implied interest rate is approximately 9.52% if you choose to forgo the discount and pay on day 28.
If your supplier offers 3/5 net 28, what is the implied interest
rate if you choose to forgo the discount and pay on day 28?
1 answer
1 answer