Forums › ACCA Forums › ACCA FM Financial Management Forums › Effective annual cost of offering a discount

- This topic has 7 replies, 4 voices, and was last updated 8 years ago by John Moffat.

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- November 2, 2014 at 1:39 pm #207252
Dear Sir,

I have tried using the logic of your lecture on discounts to solve this MCQ in the mock exam but have failed it. Kindly help.

6) A company has sales of 200M per year.

Currently on average customers take 40 days to pay.

The company is considering offering a discount of 1% for payment within 15 days and expects that 60% of the customers will take advantage of the discount.What is the Effective Annual Cost of offering the discount?

a) 15.80%

b) 9.22%

c)15.63%

d) 9.13%Thanks.

November 2, 2014 at 3:27 pm #207272It is my fault – I must re-record the lecture.

Under the old exam format, the ‘simple discount’ was only ever asked twice (as a two mark part of a question) and the method in the lecture was allowed.

Strictly it should be done differently (as below) and the strict method is now more important because of the MCQ’s.

The discount is 1/99 = 1.010101% over a period of 25 days (40 – 25).

To convert this into an annual rate, then strictly 1 + annual rate = 1.010101^(365/15)

1+ annual rate = 1.1580Annual rate = 0.1580 or 15.80%

I am sorry about that.

(By the way, in future ask in the F9 Ask the Tutor Forum if you wish me to answer. This F9 forum is for students to help each other 🙂 )

September 5, 2015 at 10:22 pm #269998Hi John,

sorry for asking here but it easier for you to understand my question.

Could you explain please from above example why do you add 1 to annual rate (calculated as 1/99 * (365/25) *100% ?

My calculation is 1/99 * 365/25 * 100 = 14.75%Thank you.

September 7, 2015 at 10:25 pm #270300@razbitnova said:

Hi John,sorry for asking here but it easier for you to understand my question.

Could you explain please from above example why do you add 1 to annual rate (calculated as 1/99 * (365/25) *100% ?

My calculation is 1/99 * 365/25 * 100 = 14.75%Thank you.

Oxana, 365/25 is power of 1.010101 not multiplied by it

September 8, 2015 at 7:04 pm #270510I do not agree Serra.

If you have a look at F9 notes at this website (Chapter 5, examples 1,4, 5) you cannot see any power of. All parts of formula multyplaied by each other and by 100%

September 8, 2015 at 7:23 pm #270515Oxana: If you look at our current lecture notes and if you are watching the current lectures (otherwise there is no point in using the notes) then you will see they are ‘to the power of’.

September 8, 2015 at 10:52 pm #270551I did and still cannot see in lectures the same answer as in notes. Any power of in such calculation in answers.

From notes:

Example 1, Chapter 5.

Customers currently take three months credit. We are considering offering a discount of 4% for payment within one month.

Calculate the effective % cost p.a. of the discount.Answer to Example 4

Effective annual cost = 4/ 96 x 12/2 x 100% = 0.041 x 6 x 100% = 25% p.a.Where is here power of?

From lectures:

The same example shows the right answer is 27.7%.Why? How should I know and believe which one is right?

ThanksSeptember 9, 2015 at 8:06 am #270576Where did you download the notes from, and when did you download them?

Because what you have typed is not what appears in the notes – what appears is the same as in the lecture.

(The examiner used to accept a simplified way – which is what you have typed – but now, because of the MCQ’s, both the lecture and the notes have been updated to show what is strictly the correct way.)

We update our lectures and lecture notes as necessary every six months – you should be using lecture notes that say “September/December 2015 exams” in a blue slash across the corner of the cover page. There is a glitch in the system which means that the online notes are still showing “June 2015 exams” – you need to download the notes using the download button and you will have the latest edition.

(This is the only bit that has been changed)

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