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In evaluating the effective cost of discount for invoice terms of 3/10, net 60, it is crucial to understand what these terms signify. The notation indicates that a buyer can take a 3% discount on the invoice amount if paid within 10 days; otherwise, the full invoice amount is due in 60 days.

To calculate the effective annual interest rate implicit in these terms, you first determine the amount that could effectively be saved by taking the discount. By not taking the discount, the buyer effectively finances the payment for an additional 50 days (60 days total payment period minus 10 days allowed for the discount).

The formula for the effective cost of the discount is as follows:

1. Calculate the discount amount: 3% of the invoice.

2. Determine the total days difference in payment options, which is 50 days.

3. Calculate the effective annualized rate using the formula:

Effective Interest Rate = (Discount / (1 - Discount)) * (365 / Days Past Discount Deadline)

Using these steps, the calculations reveal that the effective interest rate resulting from these terms leads to an indication of a significant annualized cost for forgoing the discount. This comprehensive approach demonstrates that the effective cost of discount in this scenario