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Effective Cost of Discount

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Effective Cost of Discount

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by AvatarJohn Moffat.
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  • October 31, 2017 at 5:05 pm #413887
    Avatarahmed9729
    Member
    • Topics: 66
    • Replies: 60
    • ☆☆

    Sir, for effective cost of discount, I use the formula, [ (Discount/Amount left to be paid) * (365/Reduction in days) ] *100 to get the answer. However, using your method, which is (1+R)^365/no. of days reduced , it provides a different answer. Why is that?

    Thank you

    November 1, 2017 at 6:40 am #413931
    AvatarJohn Moffat
    Keymaster
    • Topics: 57
    • Replies: 54845
    • ☆☆☆☆☆

    It is because you are using the wrong formula 🙂

    The interest is effectively compounded which is why it is taken to the power 365 to compound for 365 days.

    If you are unsure about compounding interest then it will help you to watch the free Paper F2 lectures on interest.

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