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Hi sir,
I had a doubt regarding the formula to be used to calculate this.
For the simple annual percentage cost in the context of accepting a discount from a supplier, its simply (discount received/amount paid if discount is taken)* (number of days in the year/difference between normal payment days and payment days if discount is taken) right?However for the effective annual rate of the discount, BPP and Kaplan have given different formulas:
BPP: (1+r)^(number of days in the year/difference between normal payment days and payment days if discount is taken)
Kaplan: (1+(discount/amount paid if discount is taken))^ (number of days in the year/difference between normal payment days and payment days if discount is taken) – 1
Both formulas give different answers, please clarify which one should be used In which context.
Thank you!
An example:
Currently on average customers take 40 days to pay.
The company is considering offering a discount of 1% for payment within 15 daysWhat is the Effective Annual Cost of offering the discount?
You should do it as:
They get a discount if they pay 15 days earlier than normal. (40 – 15 = 25)
Therefor over a year it will be
( (1 + 1/99) ^ (365/25) ) – 1 = 15.8%
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