ExpertHard2 marksMultiple Choice
ACCA · Question 16.2 · Working Capital Management
Section B - Case 1: Verdant Yields Co
Scenario: Verdant Yields Co is an organic avocado exporter. The business is highly seasonal. Annual credit sales are $18,250,000. The current trade receivables balance is $3,000,000. Assume a 365-day year.
Question 2: To improve cash flow, Verdant Yields is considering offering a 2% early settlement discount to customers who pay within 15 days. Currently, customers pay at 60 days.
What is the effective annual cost of offering this discount? (Use the compound interest formula)
Section B - Case 1: Verdant Yields Co
Scenario: Verdant Yields Co is an organic avocado exporter. The business is highly seasonal. Annual credit sales are $18,250,000. The current trade receivables balance is $3,000,000. Assume a 365-day year.
Question 2: To improve cash flow, Verdant Yields is considering offering a 2% early settlement discount to customers who pay within 15 days. Currently, customers pay at 60 days.
What is the effective annual cost of offering this discount? (Use the compound interest formula)
Answer options:
A.
16.22%
B.
17.81%
C.
18.50%
D.
20.15%
How to approach this question
Use the formula: Annualized Cost = [1 + (d / (100 - d))] ^ (365 / t) - 1, where 'd' is the discount percentage and 't' is the reduction in payment days.
Full Answer
B.17.81%✓ Correct
Formula: [1 + (d / (100 - d))] ^ (365 / t) - 1
d = 2%
t = 60 days - 15 days = 45 days
Cost = [1 + (2 / 98)] ^ (365 / 45) - 1
Cost = [1 + 0.020408] ^ 8.1111 - 1
Cost = 1.1781 - 1 = 17.81%
Common mistakes
Using the simple interest formula instead of the compound formula, or using 15 days for 't' instead of the difference (45 days).
Practice the full ACCA FM — Financial Management Practice Exam 5
32 questions · hints · full answers · grading
More questions from this exam
Q01**Section A**
The Global Clean Water Initiative is a non-governmental organization (NGO) focused...EasyQ02**Section A**
NeuroTech Prosthetics, a high-growth medical technology startup, is seeking additi...MediumQ03**Section A**
AeroCater Services provides specialized inflight meals to commercial airlines. The...MediumQ04**Section A**
AgriNutrient Co requires 50,000 tonnes of raw phosphate annually for its fertilize...EasyQ05**Section A**
SolarGrid Municipal is evaluating a new solar farm project. At a discount rate of ...Medium