Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Calculating Equivalent Annual Cost of Discount
- This topic has 1 reply, 2 voices, and was last updated 1 year ago by LMR1006.
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- October 22, 2023 at 7:21 pm #693837
Hi Sir,
Came across this question in the kaplan study text. I was unable to understand the solution provided by the book, would appreciate if the solution is simplified and explained in detail especially the step 2 & 3.
The question and the solution provided by the Book is belowQ) Work out the equivalent annual cost of the following credit terms. 1.75% discount for payments within 3 weeks. Alternatively, full payment must be made within 8 weeks of the invoice date. Assume there are 50 weeks in a year. Hint, consider a $100 invoice.
A)
Step 1 – Work out the discount available and the amount due if the discount were taken.
Discount available on;
$100 invoice = 1.75%*100 = 1.75 dollars. Amount due after discount is;
100*1.75 = 98.25.Step 2 – the effective interest rate cost of not taking the discount is;
1.75 / 98.25 = 0.0178
for an 8-3 = 5 week period.Step 3 – calculate the equivalent annual rate. There are 10, 5-week periods in a year.
The equivalent interest rate is;
((1 + 0.18) ^ 10)- 1 = 0.195 or 19.5%October 22, 2023 at 9:10 pm #693842I would do this as
(1 + (Disc/Inv-Disc)) ^(normal time/disc in time) – 1
The invoice is 100 so the disc is 1.75 & amount left 98.25
The normal time is 50 weeks (in a year for this question) the reduction in time is that it is dropping from 8 weeks to 3 weeks so it’s 5(1 + 1.75/98.25) ^ (50/5) = -1
1.017811705 ^ 10 = -1
= 1.193 – 1
= 0.193
19.3% - AuthorPosts
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