Early Payment Discount Example

Early Payment Discount Example

Credit Sales 50,000

Credit terms of 4/20 net 70.

Investment on a project can be made @ 20%

Should company accept discount or not

Solution

Credit terms of 4/20 net 70 shows that a 4% discount can be availed by making payment within 20 days and maximum period of payment is 70 days.

Cash Discount 4% x 50,000 =   2,000

(50/365) x 20% x 50,000    =   1,370

Cash discount offer is more attractive than investment opportunity; therefore cash discount offer should be accepted