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i m facing problem with the calculation of the receivable with and without discount and the cost of financing. Please help and state the step to followed. I have already checked in marking scheme but can’t understand
Have you watched my free lecture here on receivables management?
What we do is calculate the average receivables without and with offering the discount. We will save interest on the fall in the average receivables.
At the moment (without the discount), receivables are $18M (from the question).
With the discount, 25% will pay in 30 days and 75% in 60 days, so the average collection period (the weighted average) will be 52.5 days.
So, with the discount, the average receivables will be 52.5/365 x $87.6M (the total sales from the question) = $12.6MSo…..throughout the year, receivables will be lower by 18 – 12.6 = 5.4M, and we will save interest on this because we will be able to reduce our short-term borrowing. The saving p.a. will be at 5.5% (the cost of short-term borrowing from the question).
but in answer marking scheme it has been calculated differently…Can you please list the steps plz
The examiners answer has not done it differently at all!!
He calculates the revised receivables days – 52.5. Just like I did.
He writes down the current level of receivables – $18M. Just like I did.
He calculates the new receivables – $12.6M. Just like I did.
He calculated the reduction in receivables – $5.4M. Just like I did.
He calculates the reduction in finance cost at 5.5%. Just like I said.Which bit is different? It is exactly the same.
You did not ask about the admin savings or the cost of the discount. Those are obvious anyway.
To learn by steps is silly for Paper F9. The exam is full degree level and every question is different because he is checking that you understand what you are doing.
Have you watched the lecture on receivables management?
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