CRMC - Practice Assessment Q 1.7 (b)

Dear broom123

How is the simple annual interest rate of the discount calculated?

In your question your company wants the clients to pay within 14 days rather than within the normal credit period of 28 days.
This is reduced credit period of 14 days.
As a reward for paying early your company discounts the total amount payable by clients by 5% and will receive 95% of the total invoice value. This constitutes a discount on the amount received of 5/95 = just over 5.26%

To covert 5.26% for 14 days into an annual amount, find the number of 14 day periods in a year 365/14 = 26.07
And multiply 5.26 by 26.07 to find 137.13%. On a spreadsheet I got 137.218% because I'd not rounded the numbers, but your examiner will not set mulitple choice questions where this difference exists. So, don't worry about it

As a formula simple annual interest rate of a early payment discount
Number of times the reduced credit period exists in a year x the discount as a % of the money actually received = rate