September 2015 question 3

Hie John,

The question wanted an evaluation whether ZXC co should introduce early settlement discount .there are no answers to the paper yet .$30m million is the income per year of which 80% are sales on credit .an early settlement discount of 0.5% for payments within 30 days has been offered .The finance director recognizes $35,000 in administration costs as a result and reduction in ha debts from 0.5% to 0.375% of credit sales .the year has 306 days and cost of short term finance is 4%.

So I did this but am not sure:
Current receivables =30,000,000*80%*51/360=3,400,000
Revised receivables =30,000,000*80%*30/360*75%=1,500,000
-this gave me a total reduction in receivables by 1,900,000*4%=76,000(finance cost savings )
-for savings in bad debts I deducted 0.375% from 0.5% *80%*30,000,000=30,000
Therefore a total saving of $106,000(30,000 +76,000).

However administration costs of 35,000 plus the value of discount (0.5%*80%*30,000,000*75%=125,000.this means that the discount will not financially benefit the ZXC co .