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  1. avatar says

    dear sir,
    after listening to the tuition i tried answering the following question but im not getting the correct answer. can you please help me out.
    paisley co has sales of $20 million for the previous year, receivables at the end of $4 million and the cost of financing receivables is covered by an overdraft at the interest rate of 12% p.a. it is now considering a cash discount of 2% for payment of debts within 10 days. should it be introduced if 40% of customers will take up the discount??
    my answer was cost of discount $160 000 and savings p.a $261699
    4m/20m x 365= 73 days
    73 days x 60%= 43.8 days
    20m x 43.8/365= $2.4 m
    new receivables
    10 x 40%= 4
    4/365 x 20m= $219178

    2400000-219178=2180822
    2180822x 12%= 261699

    cost of discount 20m x 2% x 40%= $160 000
    savings p.a= $261699

    the answer in the book is savings of $165699
    can you please tell me where is my mistake.
    thanks in advance

    • Profile photo of John Moffat says

      @chicababes1991, Currently receivables are 4M (we assume that they are at this level throughout the year)

      The new receivables will be :

      not taking discount: 60% x 73/365 x 20M = 2.4M

      plus

      taking discount: 40% x 10/365 x 20M = 219,178

      So new recbles in total = 2400000 + 219178 = 2619178

      So interest saving is 12% x (4M – 2619178) = 165699

      (current recbles are 4M throughout the year. In future they will be 2619178 throughout the year. So the interest saving is 12% of the difference,)

      Hope that helps.

  2. avatar says

    Calculation of the new receivables after ofering the discount in example 2 should use 99 % of the $20m (as opposed to $20m) multiplied by 54/365 as that is the new sale p.a.. Any thoughts? Thank you

    • Profile photo of tameablebunchy says

      @zsolt8007,

      If I understood it correctly you are trying to ascertain whether its worth giving the discount and you have to consider the full receivables, I believe the only time you use a percentage is if the question had said receivables is 20m and we have already collected 1m. Commentst anyone.

  3. avatar says

    this is the only time i have really enjoyed my F9 through the lectures by John Moffat because i understand the concept behind and its now easier for me to tackle most questions
    Thank you May God bless you

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