Discount Rate

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