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In June 2011 question 4 part b
(1) Early settlement discount
I am getting a net benefit of $2157
This is how I calculated:
Therefore reduction on finance cost is $6657
Discount cost= 900000*0.005=$4500
there net benefit is $2157
I 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.