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. |
|
ILLUSTRATION 1 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? Solution: Cash discount not taken=5% x $100,000 =$5,000 Credit period =60-10 days =50 days Annualized cost = Discount Percent x 360 (100-Discount %) (Credit period) =5%/95% x360/50 = 37.9% ILLUSTRATION 2
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? Solution: Cash discount = 3% x $100,000 =$3,000 Principal borrowed =$100,000 -$3,000 =$97,000 Credit period = 30 days – 10 days =20 days Simple interest calculation: Principal x interest x time (Prt) =$100,000 x 10% x 20/360 = $555.56 Net amount saved = Cash Discount – Interest = $3,000 -$555.56 = $2,444.44 |