Home For AAT student members AQ 2013 AAT Level 3 (Level 6 in Scotland)

Discount Rate

a05boothrja05boothrj New MemberRegistered Posts: 8
Hi, can anyone think of a handy way of remembering the formula for the discount rate on the OCMC sim?? I've been taught the big D little d way but it's just not working for me! Sim tonight!! :ohmy::ohmy::ohmy:

Comments

  • sdvsdv Experienced Mentor Registered Posts: 585
    I did't use the formula but used the simple following logic.

    1 find howmany days is the debt settled before due (Days saved)
    2 the cost of discount over days saved
    3 the cost od savings per day (days saved)
    4 annualise the cost of savings ( multiplying by 365 days)
    5 divide the total cost by the principle
    6 gives you the annualised discount rate

    Example

    Say the average customer invoice is £3000 and normal terms of trade are 30 days from invoice date.

    If the company is considering 3% settlement discount for payments within 7 days, How do you calculate the annual percentage cost of this discount?

    can anyone show me how I would work this out, thanks.



    Answer

    How much discount will you give? (3000 x 3%) = £90

    How much money will you receive? (3000 – 90) = £2910

    How many days early are you receiving the settlement? (30 – 7) = 23 days

    Therefore the annualised cost = £90 divide by 23 days times 365 days = £1428.26

    Therefore Annualised % rate = 1428.26 divide by 2910 times 100 = 49.08%


    The cost of receiving the debt 23 days early = 49%. (annualised rate)




    Or

    £90 divide by £2910 times 100 = 3.093%

    3.093% divide by 23 times 365 days =49.08% annualised % rate
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