This is the second part of a series of 3 articles on Cash Discount which dealt with
- the use of borrowings to pay to take advantage of Cash discount
BORROWING TO TAKE ADVANTAGE OF CASH DISCOUNT.
Mr A bought some goods valued at $100,000 with a cash discount terms of 5/10, n/60.
What is the annualized cost of the credit if the cash discount is not taken?
Cash discount not taken=5% x $100,000
Credit period =60-10 days =50 days
Annualized cost =
Discount Percent x 360
(100-Discount %) (Credit period)
On 20th January 2006, Mr A bought some goods at $100,000 with cash discount term 3/10,n/30.
To pay the invoice on 30 th January, she borrowed the money for 20 days at 10% per annum simple interest.
How much did she save by borrowing to take advantage of the discount?
Cash discount = 3% x $100,000 =$3,000
Principal borrowed =$100,000 -$3,000 =$97,000
Credit period = 30 days â€“ 10 days =20 days
Simple interest calculation:
Principal x interest x time (Prt)
=$100,000 x 10% x 20/360
Net amount saved = Cash Discount â€“ Interest
= $3,000 -$555.56