Question 1

Section B - Case 1: AquaHarvest

Scenario: AquaHarvest operates offshore kelp farms. The company has annual credit sales of $18 million. Currently, customers take an average of 45 days to pay. AquaHarvest finances its working capital through a bank overdraft at an interest rate of 8% per annum. Assume a 365-day year.

To improve cash flow, the finance director proposes offering a 2% early settlement discount to customers who pay within 15 days. It is expected that 40% of customers will take the discount, while the remaining 60% will continue to pay in 45 days.

Question: What is the effective annual interest rate (cost) of offering this discount? (Use the compound interest formula)

Accepted Answer

Use the effective annual rate formula for discounts: Cost = [1 + (d / (1-d))] ^ (365 / t) - 1, where 'd' is the discount percentage and 't' is the reduction in payment days (45 - 15 = 30 days).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Using 15 days as 't' instead of the days saved (30 days).

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 6

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