Question

What is the optimal cash discount percentage if the cash discount period is 5 days, credit period is 75 days and annual cost of capital is 15%?

Answer 1

Given

Cash discount period = 5 Days

Credit period = 75 Period

Annual Cost of Capital = 15%

We know that

OptimalCash Discount percentage = [R* ( C-D)/365]/[ 1+ { R*( C-D)/365}]

Here R= Annual Cost of Capital

C = Credit period in Days

D = Discount period in Days

Optimal Cash discount percentage = [ 0.15* ( 75-5)/365] / [ 1+{ 0.15* ( 75-5)/365]

= [ 0.15*70/365]/[ 1+{ 0.15*70/365}]

= [ 0.028767]/[ 1+0.028767]

= [ 0.028767] [ 1.028767]

= 0.0027963 or 2.7963%

Hence Optimal Cash discount is 2.7963%