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In June 2011 question 4 part b
(ii)
(1) Early settlement discount
I am getting a net benefit of $2157
This is how I calculated:
Current :
=900,000*90/365*4.5%=$9986
Revised:
=900,000*30/365*4.5%=$3329Therefore reduction on finance cost is $6657
Discount cost= 900000*0.005=$4500
there net benefit is $2157I did not get the examiner comment
The discount is for payables.
If they pay early they will save the discount of 4500 (it is not a cost!)
However paying early will increase the finance cost by 6657 (not reduce it!)Therefore taking the discount and paying early will have a net cost (not a saving) and is not worthwhile.
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