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Could you please tell me how the answers are arrived at for the following
1. A company has sales of $200m per year. Currently customers take on average 40 days to pay. The company is considering offering a discount of 1% for payment within 15 days and expects that 60% of customers will take advantage of the discount
What is the effective annual cost of offering the discount
the discount is 1/99 = 0.010101 over 25 days (40 – 15).
So the annual cost is 1.0101^(365/25) – 1 = 0.1580 (or 15.80%)
(The fact that 60% will take the discount is irrelevant – we cannot force them to take the discount, but it is costing 15.80% on those who do.)
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Could you please explain how you got 0.1580?
Thanks
Errr…it is what I wrote: (1.0101^(365/25) ) – 1
365 because 365 days in a year, 25 because 25 days early.
Obviously you need a scientific calculator to actually do the arithmetic.
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Ohhh got it. Thanks.
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