ACCA FM · Chapter 4 · Question 7 of 12
A company currently allows customers 50 days' credit. It is considering offering a 1.5% early settlement discount for payment within 10 days. What is the effective annual cost of the discount, using compound interest and a 365-day year?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) 14.8%
Explanation
Customers taking the discount pay 98.5 per 100 owed, 40 days earlier. The cost for 40 days is 1.5/98.5 = 1.523%. Annual compound cost = (100/98.5)^(365/40) - 1 = 14.79%, which is 14.8% to 1 decimal place. The simple-interest equivalent is 13.9%, and using 50 days instead of the 40-day acceleration understates the cost.
More Managing inventory, receivables and payables MCQs
- Q9A company has annual credit sales of $7.3m and receivables of 70 days. A factor would reduce the collection period to 40 days for a fee of…
- Q10A supplier offers a 2% discount for payment within 15 days. The company currently pays after 60 days. What is the effective annual cost of…
- Q11Which of the following correctly distinguishes invoice discounting from factoring?
- Q12Which of the following is the LEAST appropriate way for a company to manage the risk of a new credit customer failing to pay?
- Q1A company uses 48,000 units of a component each year. Each order costs $150 to place and it costs $2.40 to hold one unit in inventory for…