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Sir, how come we know there is net benefit in case of payables & receivables?
and what’s the formula of net benefit?
There is no formula.
You have to list the costs and the benefits (over a year) and then decide if there is a net benefit or a net cost.
Have you watched my lecture on this?
yes, i have watched.
Sir, I couldn’t understand how do we have net benefit in example 5 of chapter 5???I have understood the calculation but i am unable to understand the conclusion.
”Effective cost of discount is 22% > 13% overdraft interest , so we take the discount”. Why????Isn’t it like this that if we are payables we could take discount if it costs higher than overdraft interest and vice versa.
And if we are are receivables , we wont give discount if it costs higher than overdraft interest and vice versa.Am i right???
In example 5, it is costing us 22% if we do not take the discount.
But if we do not take the discount then we pay later and save only 13% in overdraft interest.
It is better therefore to take the discount and pay early – we will gain 22% from the discount and only lose 13% from the extra overdraft interest.Your second message is correct and agree with what I have just typed above 🙂
(because example 5 is payables)An overdraft is a negative bank balance. You have to pay interest on a negative bank balance. If you pay payables early then you will have a bigger overdraft and therefore pay more interest.
how come is that If we pay payables early then we will have a bigger overdraft??
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