Cost of early settlement discounts

Llisa8316y ago

I have a question.. In the lecture relating to chapter 5 example 1 (Early settlement discounts)it more or less states that the cost of early settlement discount is calculated by the following formula: D/100-D multiplied by 365/reduction in payment period(in days).

However, in my text book it gives the formula 1-(100/(100-D) TO THE POWER OF 365/reduction in payment period(in days).

I can see that the fist part of the formula is more or less the same, but why is it in the example in my book it states the formula is to the power of instead of multiplied by 365/reduction in payment period(in days).

Are they refering to the same thing?.. because they both give different answers! I am confused!

Thanks

Tthorned13y ago#1

I can't see an answer to this question but this is also a question I was going to ask? Any help greatly appreciated? Thanks Danielle

<cite>@LISA83 said:</cite> I have a question.. In the lecture relating to chapter 5 example 1 (Early settlement discounts)it more or less states that the cost of early settlement discount is calculated by the following formula: D/100-D multiplied by 365/reduction in payment period(in days). However, in my text book it gives the formula 1-(100/(100-D) TO THE POWER OF 365/reduction in payment period(in days). I can see that the fist part of the formula is more or less the same, but why is it in the example in my book it states the formula is to the power of instead of multiplied by 365/reduction in payment period(in days). Are they refering to the same thing?.. because they both give different answers! I am confused! Thanks

John MoffatTutor13y ago#2

Strictly the method in your text book is correct. The other method is just an approximation. However on the very few occasions that 'simple' discounts have been asked, it has only been for 1 or 2 marks (as part of a question) and the examiner has given the marks for either approach. Most questions involved discounts in the exam are the more 'complicated' situation where you need to calculate the costs and savings over a year in order to make the decision.

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