MCQ- Effective Annual cost of discount

This topic has 5 replies, 3 voices, and was last updated 10 years ago by John Moffat.

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May 18, 2015 at 8:36 am #246782
stuartander
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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
Stuart
May 18, 2015 at 8:54 am #246789
John Moffat
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The 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%)
May 18, 2015 at 8:56 am #246791
stuartander
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I have worked it out. sorry, thanks
May 18, 2015 at 4:15 pm #246906
John Moffat
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No problem – glad you worked it out 🙂
November 14, 2015 at 9:01 pm #282416
mpatel14
Member
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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%
November 15, 2015 at 9:00 am #282478
John Moffat
Keymaster
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No. If the discount was 5% then it would be 5/95 (the rest would be as you have typed).
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