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Hi,
I am having a moment, I don’t seem to be able to work this out 🙁 (I know I have done it before)
Annual Sales $200m
Currently customers take on average 40 days to pay
Company is considering offering a discount of 1% for payment within 15 days and expects 60% of customers will take advantage of the offer.What is the effective annual cost of offering the discount?
A- 9.22%
B- 15.63%
C- 9.13%
D- 15.80%Please could someone explain
Thanks
StuartThe discount is 1/99 = 1.010101% over a period of 25 days (40 – 15).
So the annual cost (R) is given by (1+R) = (1.010101)^(365/25)
R = 0.1580 (or 15.80%)
If the discount was 5% would it mean we’ll have to do 1/95 = 0.01053 then + 1 = 1.015053^(365/25) = 16.5%
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