Question

Helen had to make a payment of $1,750 in 11 months and $1,250 in 14 months, to a raw material supplier. What single payment in 5 months would settle both these payments? Assume a simple interest rate of 3.25% p.a. and use 5 months from now as the focal date.

Answer 1

Any Creditor paid amount before due date,so supplier gives a discount on pre payment of debt.

First payment in 11months of $ 1750, we paid in 5 th month, amount paid before 6 months from due date.

Discount on first payment = Amount owed * Rate of interest * paid months before due date / 12

= 1750 * 3.25% * 6/12

Discount on first payment= $ 28.4375

Second payment in 14months of $ 1,250, we paid in 5 th month, amount paid before 9 months from due date.

Discount on second payment = 1,250 * 3.25% * 9/12 = $ 30.46875

Total discount = $ 28.4375 + 30.46875 = $ 58.90625

Total amount paid in 5th month = first payment + Second payment - total discount = $ 1,750 + 1,250 - $ 58.90625

Single Amount paid in 5th month = $ 2,941.09375