Example 5 – Annual interest (5.2. Settlement discounts)

Hi Chris, My answer to the below question is 12.74%. Therefore, when compared with an overdraft rate of 15% settlement discount is a cheaper option for the business. If I am wrong, could you please let me know the correct answer and backing to calculate the numbers? Thanks for the very useful study materials and great lecture notes. Dory’s customers all pay their accounts at the end of 60 days. To try and improve its cash flow, Dory is considering offering all customers a 1.5% discount for payment within 14 days. Assume overdraft interest is 15%. Calculate the implied annual (interest) cost to Dory of offering the discount, using compound interest methodology and assuming a 365 day year and an invoice value of $500.