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Rakhi Vasavada
Rakhi Vasavada , Financial and Legal Consultant
Category: Finance
Satisfied Customers: 4419
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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Calculate the approximate annual rate of return on investment

Customer Question

Calculate the approximate annual rate of return on investment of the following cash discount terms:
1) 1/15, n30.
2) 2/10, n60
3) 1/10, n90.

Which of these terms, if any, is not likely to be significant incentive to the customer to pay promptly? Explain your answer.
Submitted: 5 years ago.
Category: Finance
Expert:  Rakhi Vasavada replied 5 years ago.

Dear Friend,

 

Your Calculations are as under:

 

Annual rate on return on Investments is calculated as under:

 

Cash Discount Rate * (365/(Term of Payment - Cash Discount Period))

 

Thus, in case 1, i.e. 1/15, n30.,

1*(365/(30-15)) = 1*(365/15) = 1* 24.33 = 24.33%

 

 

In case 2, i.e. 2/10, n60,

2*(365/(60-10)) = 2*(365/50) = 2*7.30 = 14.60%

 

In Case 3, i.e. 1/10, n90

 

1*(365/(90-10)) = 1*(365/80) = 1*4.56 = 4.56%

 

 

So, in above case, the third term, i.e. 1/10, n90 will not give any significant incentive customer to pay promptly as the return is the lowest.

 

I hope this helps...

Warm Regards,