# Unit 15 - additional Question - discounts

Hi there,

I have got to sit additional questions to complete this Unit:(

Fairly, easy question - never expected I cam fail on this:

Passeme Ltd is considering giving discounts for prompt payments from customers.
The average customer invoice is 2000£ and normal terms of trade are 90 days.
The Co is considering giving a 2% discount for payment within the 30 days of invoice date.

**Calculate the annual percentage cost of this discount?

I use the following formula:

d/100-d x 365/N-D x 100% =2/98 x 365/6o x 100% = 12.41%

and I don't know what I have done wrong that I have failed this question in my Simulation?

Can anyone confirm if my calculation/formula for this task is correct?

• discount for prompt payment
scooby27 wrote:
Passeme Ltd is considering giving discounts for prompt payments from customers.
The average customer invoice is 2000£ and normal terms of trade are 90 days.
The Co is considering giving a 2% discount for payment within the 30 days of invoice date.

**Calculate the annual percentage cost of this discount?

You are well on the way but need to appreciate that the skills test requires a cumulative approach to APR calculations
d/100-d gives you the % of the net amount that the company will receive
365/N-D gives you the number of times in a year that need to be treated to convert the % rate to an APR

but the multiplication is the error

You need to treat the 365/N-D as the index

The 2/98 gives a rate of 2.0408%
The 365/60 days early gives 6.08333 times a year

So my calculation is (1+ 2.0408%)^6.08333 less 1
giving an APR of 13.0771% or 13.1%

This whole subject area has been the subject of many threads over the past few months, but I am confident that if you calculate the APR in the way I've described you'll be marked as competent on any AAT unit 15 skills test.
Sandy
[email protected]
www.sandyhood.com
• Can I add that I was told to do the first part of the sum so it came out at LOADS of decimal places, then do the second part of the sum, again to LOADS of decimal places THEN to times those two numbers together, dont round them up.
Good luck :-)
• Hello Sandy,

Firstly, thank you for the explanation I have not catch up from my Kaplan Book that I need to calculate it in that way..

There are 2 separate ways given for the calculation of APR - one described as being alternative to the other one..

After going back to my book I have had a look at the "alternative method" and still do not understand the calculation from the book and yours - please see below:

You need to treat the 365/N-D as the index

The 2/98 gives a rate of 2.0408%
The 365/60 days early gives 6.08333 times a year

So my calculation is (1+ 2.0408%)^ 6.08333 less 1 - where does the 1 comes from? (is it for one year??)
Giving an APR of 13.0771% - how did you achieve this result? Or 13.1%

Sorry, could you please confirm what this symbol means - ^ ??

• ^ means to the power of.

Try calculating the 2.0408% (0.020408) to the power of 6.08333 instead of the 1.020408 and you realize that can't be the right answer.

The 1 represents the 100%, which is the base sum.
If you calculate the compound interest on something, you would have a base sum where you calculate the interest on, in this case represented by a 1 (or 100%).

After you calculated how much the interest is, or how much the sum has grown, you deduct the 1 (100%) to see how much the difference is.

Although I am not the best in explanations, so hopefully you get a bit clearer one soon!
• but how to calculate 1.0204 to the power of 6.08333??

what do I do with the figures?

• 1.0204 to the power of 6.08333:
If you put it in an excel formula it would be:
=1.0204^6.08333

If you put it in your calculator, usually you put the 1.0204 in first and then look for the button with the Y with a little x next to it, or some other random letter. Not all calculators have this though and then put the 6.08333 in and hit =.

As to what to do with the figures, the result of 13.1% is the annual cost of giving a discount. Which can be used to compare it to for example the interest cost of a loan or an overdraft.

Hope that helps,
Rinske
• hello Rinske,

thank you for your answer, however I do not have a calculator with this Y and x next to it - bottom,

is there any manual way of calculating it?

I know that "to the power of" - ^ - in maths- lets say 2^2 = would be the same calculation as 2 squred, (2x2)

so analogically with my calculation = 1.0204^6.08333 - would be: 1.0204 x 1.0204 x 1.0204 x 1.0204 x1.0204 x 1.0204)= which is 1.0204 to the power of 6,

what about the 0.08333 figure left?
what do I do with this?
• I'm finding all this discussion of ^ "to the power of" a little bizarre. In the live paper you can do the simple calculation that doesn't take into account the effect of compound interest. The formula is:

d/100-d x 365/N-D x 100%

Where d = the amount of the discount offered
N = Normal settlement period in days
D = Settlement period for early payment

So, for example, a discount of 3% if paid within 7 days instead of 30 days would be:

3/97 x 365/23 = 49%

If you're using Osborne books it's on pages 182-183.

Trust me, if you use this method it will be marked correct and saves all the hassle of trying to use fancy buttons on your calculator. I'm an assessor and I have the Unit 15 answer booklet in front of me so I KNOW it will be marked right!
• I agree with coojee, this is the way in which i have been taught this formulae and is far easier to remember and use accurately.

Good Luck with your extra questions
Have faith you will be fine :-)