# Unit 15 - additional Question - discounts

scooby27
Settling In NicelyPosts:

**17**Registered
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?

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?

## Comments

2,034Registered, ModeratorYou 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.

[email protected]

www.sandyhood.com

231RegisteredGood luck :-)

17RegisteredFirstly, 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 - ^ ??

Could you please help with these?

2,453RegisteredTry 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!

17Registeredwhat do I do with the figures?

help please.

2,453RegisteredIf 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

17Registeredthank 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?

794Registeredd/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!

107RegisteredGood Luck with your extra questions

Have faith you will be fine :-)