Some sort of time value of money formula..? Suggestions welcome!

[MDW1954]

A weird one, here, not totally *on* topic, but not totally *off* topic, either. Your indulgence is craved.

As part of a work-related project, I've been researching dynamic discounting. (Dynamic discounting, briefly, is where a customer pays a supplier's invoice ahead of the due date, in exchange for a discount.)

One report that I looked at states that:

The potential rewards for early supplier payments are great. Even the standard discount of 2 percent for payment within 10 days translates
to an annual percentage rate of 36 percent.

A subsequent sentence makes clear that this is the benefit accruing to the customer, not the supplier.

Now, there are all sorts of ways in which a figure of 36% could be obtained. No clue was provided. But something about the wording hints at a mathematical calculation here -- the time value of money, and all that.

It's important to note that I would be extremely suspicious about the value of any simplistic Excel-type formula in real life. In the real world, the benefits of such a discount would take some considerable disentangling. But is there a simple Excel-type formula at work, here? And if so, what is it?

In other words, can anyone suggest a way in which 36% is obtained?

TIA for any suggestions!

MDW1954

[PinkDalek]

A weird one, here, not totally *on* topic, but not totally *off* topic, either. Your indulgence is craved.

As part of a work-related project, I've been researching dynamic discounting. (Dynamic discounting, briefly, is where a customer pays a supplier's invoice ahead of the due date, in exchange for a discount.)

One report that I looked at states that:

The potential rewards for early supplier payments are great. Even the standard discount of 2 percent for payment within 10 days translates
to an annual percentage rate of 36 percent.

A subsequent sentence makes clear that this is the benefit accruing to the customer, not the supplier.

Now, there are all sorts of ways in which a figure of 36% could be obtained. No clue was provided. But something about the wording hints at a mathematical calculation here -- the time value of money, and all that.

It's important to note that I would be extremely suspicious about the value of any simplistic Excel-type formula in real life. In the real world, the benefits of such a discount would take some considerable disentangling. But is there a simple Excel-type formula at work, here? And if so, what is it?

In other words, can anyone suggest a way in which 36% is obtained?

TIA for any suggestions!

MDW1954

Rather than reinvest the wheel, this should explain the arithmetic https://www.accountingcoach.com/blog/wh ... annum-mean

[Lanark]

While you can calculate an annual rate, in this example it is meaningless to do so because that isn't on offer - if they pay 20 days early or 100 days early they still wont get a bigger discount than 2%

[mc2fool]

The potential rewards for early supplier payments are great. Even the standard discount of 2 percent for payment within 10 days translates to an annual percentage rate of 36 percent.

:
...can anyone suggest a way in which 36% is obtained?

No, because the information provided is insufficient (although we can try and reverse engineer it). The 10 days is irrelevant for calculating an annualised rate, what is relevant is the difference between the discounted and non-discounted deadlines.

Consider the easy case: your bill is 100 and you have 375 days to pay it, however if you pay within 10 days you can pay only 98.

In that case you get a 2% discount if you pay 365 days early, so the annualised rate is clearly 2%.

On a quick calculation, for a 2% discount to get an annualised 36% rate you'd have to pay 24 days early, so your invoice would say, your bill is 100 and you have 34 days to pay it, however if you pay within 10 days you can pay only 98.

So, what you need to calculate the 36% is the discount rate (2%) and the difference between the discounted and non-discounted deadlines (24 days).

[MDW1954]

Thanks, everyone! It's an even cruder calculation than I'd guessed.

Your help is most appreciated.

MDW1954