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Jackson Automotive Inc. of California agrees to sell specialized automotive parts to Hidatsi of Korea. Because the two companies have never done business with each other, Jackson requires a banker's acceptance as payment for the $1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Jackson Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum.
-Refer to Instruction 22.1. What is the size of the discount (not including the commission fee)Jackson must take for receiving the proceeds of the sale today rather than waiting for six months?

Question

Quizplus · Accepted Answer

To calculate the size of the discount, we need to find the present value of the banker's acceptance. The formula for present value with discounting is: present value = future value / (1 + discount rate)^time.

Future value of banker's acceptance = $1,000,000 
Time = 6 months = 0.5 years

Without the commission fee, the annualized discount rate is 1.40% (1% discount rate + 0.4% commission per annum). 
Discount rate for six months = 1.40% * 0.5 = 0.70%

Present value = $1,000,000 / (1 + 0.70%)^0.5 = $993,041.

Therefore, the discount Jackson must take for receiving the proceeds of the sale today rather than waiting for six months is $1,000,000 - $993,041 = $6,959. This is closest to option B, $5,000.

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