# calculating settlement discount

deborahcarpenter
Well-KnownRegistered Posts:

**161**
i have been told my answer is incorrect on this question but i cant see where i am going wrong. Could someone please look at my calculations and tell me where i am going wrong.

' a business is considering offering settlement discount terms of 2% for payment within 14 days. The average normal settlement period is 30 days. '

I have calculated

2/100-2 x 365/30-14 x 100 = 46.55

I have been told the answer should be 26.6%. Where does that come from?

Thanks in advance

' a business is considering offering settlement discount terms of 2% for payment within 14 days. The average normal settlement period is 30 days. '

I have calculated

2/100-2 x 365/30-14 x 100 = 46.55

I have been told the answer should be 26.6%. Where does that come from?

Thanks in advance

0

## Comments

2,034Before I go on and show you how to find the correct rate, please can you check that I have understood the question you have posed?

Customers are allowed to pay 2% less than the invoice value provided they pay within 14 days (rather than within 30 days).

If I have understood the question correctly then there are 3 sums to do.

Here is a narrative explanation.

Step 1 finds the % you allow out of the amount you will receive

Step 2 finds how many periods there are in a year

Step 3 compounds the % you allow (in this case for 16 days) so you can see how much this is equivalent to for a whole year.

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www.sandyhood.com

161Does this make any difference?

and how do you work out the power of?

56Hi Deborah,

I think we could look at this question quite simply. Let suppose the question was rephrased another way - for example - lets say that a company will lend you X amount of money at an interest rate of 2% per month? What would be the APR for this monthly rate. This is effectively what we are doing except that we have turned it around by saying what is the APR on a 2% monthly discounted rate. The 14 days and the 30 days are irrelevant and not needed in order to calculate the answer.

APR for 2% monthly rate of interest is therefore calculated as:

(1+2/100)^12 - 1 = 26.8%

Not sure why they got 26.6 instead of 26.8 because this is what my calculator is giving me. But I am pretty certain that this is how you calculate it.

2,034The power of button is not on all calculators.

it looks different from one to another, my casio fx-83ES has x with a square in the same place as you'd expect the 2 in a "squared" or "cubed" expression.

Others have the ^ rather like key boards have ^ above the 6.

I checked with AAT over the style of questions that can be asked on this topic. In the past, the compound method I showed had become the correct approach.

I now gather that the questions will add "compound" to questions that need to be answered in this way.

The other method is called "simple interest" and uses the method you showed.

So you need to be able to use both.

[email protected]

www.sandyhood.com

2,034I haven't added much to your original calculationCustomers are allowed to pay 2% less than the invoice value provided they pay within 14 days (rather than within 30 days).

If I have understood the question correctly then there are 3 sums to do.

1. Find out what 2% is as a % of the amount that the customer will actually pay.

2. Find out how many days earlier you will receive the money, and how ,many periods of this earlier payment are in a year.

3. Then say the percentage rate multiply by the number of periods

1. 2/98 = 0.020408

2. 30-14 = 16 and 365/16 = 22.8125

3. 0.020408 x 22.8125 = 46.55%

Here is a narrative explanation.

Step 1 finds the % you allow out of the amount you will receive

Step 2 finds how many periods there are in a year

Step 3 mulitplies the % you allow (in this case for 16 days) so you can see how much this is equivalent to for a whole year.

[email protected]

www.sandyhood.com

2,034I have copied out this question from Part 1.

A company's terms of payment are 28 days. It is offering a discount of 5% for payment within 14 days. Customer A owes £1,000.

Calculate the amount A will pay if they take advantage of the discount and also the

annual interest rate of the discount.simple[email protected]

www.sandyhood.com

2,034A company's terms of payment are 28 days. It is offering a discount of 5% for payment within 14 days. Customer A owes £1,000.

Calculate the amount A will pay if they take advantage of the discount and also the

annual interest rate of the discount.compound[email protected]

www.sandyhood.com

2,034https://www.aat.org.uk/servlet/file/CMGT_CRMC_Study_Support_Unit_15_OCMC_Simulation_D2014.pdf?ITEM_ENT_ID=108467&download=1

Look at task 5 of the D2014 skills test

[email protected]

www.sandyhood.com

161also had to say what the difference was between public and private sector cash balances.

Hopefully i have done enough to pass this unit now.

Thanks again.