DT plc has £15m per year credit sales and gives 90 days credit Proposal: introduce 3% discount for payment in 15 days, lower credit to 60 days 60% of customers will take discount Sales will be unaffected Short-term borrowing is at 20% interest rate

 

Analysis:

Current receivables: £15m x (90/365) = £3,698,630

Proposed receivables: (£15m x 60%) x 0.97 x (15/365) = £358,767

£15m x 40% x (60/365) = £986,301

Decrease in receivables: (£3,698,630 - £358,767 - £986,301 ) = £2,353,562

Value of decrease in receivables = £2,353,562 x 20% = £470,712

Cost of discount = £15m x 60% x 3% = (£270,000)

Net benefit of new policy = £200,712

Proposed policy is worth implementing
 

Using the same method of calculation, calculate whether the proposed discount will result in a net saving or cost for the following :

DT plc has £20m of sales per year all of which are made on 60 days credit terms

DT's CFO is considering offering a 10% discount for early payment (within 20 days)
It is forecast that 40% of DT's customers will take the discount and the remaining 60% will continue to pay in 60 days.

The short-term borrowing interest rate is 15%.

Answer rating: 100% (QA)

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