JENNY Company has been granted credit terms of 2/10, net 30 by the supplier. JENNI operates 360 days a year. Required: 1. Compute the nominal annual cost of credit or the cost of forgoing the cash discount 2. If the prevailing nominal interest rate of commercial bank on loan is 10% per annum will it be favorable for JENNY not to pay within the discount period and use the money as the source of financing? Discuss your answer briefly. 3. Compute the effective annual rate of trader's credit.

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Effective Interest Rate

The term interest rate can be defined as the amount that is charged by the lender as a percentage on the principal amount. Interest rate which is charged annually is known as annual percentage rate.