Question

BACKGROUND:

There is also a provision in the contract that SM would receive a discount (similar to that which would be reflected in a separate financing transaction between EYE SPY and SM) from the contract price of $10.1 million if they pay the cash component within three days of when the contract is signed. EYE SPY determined a discount of $500,000 for this financing based on applying the typical credit rate for the equipment and integration services to be delivered at the end of year one and the monthly delivery of maintenance services in year two through six of the contract.

MY QUESTION

How do I calculate the discount rate?

Answer 1

Given

SM would receive a discount from the contract price of $10.1 million if they pay the cash component within 3 days of when the contract is signed

EYE SPY determined a discount of $500,000 for this financing.

Requirement

Discount rate = Dicount determined/Contract price *100

i.e., Discount rate = $500,000/$10,100,000*100

Therefore, Discount rate = 4.95%

Note:

Basis for discount amount determination i.e., "Typical credit rate for the equipment and integration services to be delivered at the end of year one" AND "Monthly delivery of maintenance services in year two through six of the contract" is irrelevant to find out the discount rate.