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Receivables Question

This topic has 1 reply, 2 voices, and was last updated 9 years ago by John Moffat.

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May 7, 2015 at 10:33 pm #244724
ogg27
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- Topics: 6
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Please can you help me understand this question. I’m pretty confused.
Company has sales of 200m /year. Currently customers take on average 40 days to pay. Company considering offering discount of 1% for payment within 15days and expects that 60% of customers will take advantage of discount.
What is the effective annual cost of offering the discount?
Thank you ever so much.
Tess
May 8, 2015 at 8:46 am #244751
John Moffat
Keymaster
- Topics: 57
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On every $100 invoiced, the discount is costing 1/99 (= 1.010101%) over a period of 25 days (40 – 15). To turn this into an annual effective rate (R), 1+R = (1.010101)^(365/25)
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