Peaches Creamery Ltd. would like to reduce the average number of days it takes to collect its receivables from 60 days down to 30 days. Peaches thinks this can be accomplished by offering a 1% discount to customers who pay withing 30 days. Precisely what is a customer's annualized cost of forgoing the discount?

Question

Quizplus · Accepted Answer

The annualized cost of forgoing the discount is the discount rate divided by the fraction of the year that the discount is available. In this case, the discount rate is 1% and the discount is available for 30 days out of 365 days in a year. Therefore, the annualized cost of forgoing the discount is 1% / (30/365) = 12.2%.