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Matthew Co. is determining the cash discount given to customers when they pay within 15 days. Currently, the company uses a 360-day year, and the full amount of a receivable is due within 45 days. Furthermore, it wants the cost of not taking the discount to approximate the 18.27% annual interest rate it pays on its working capital loan.
What is the cash discount rate?
1.5%

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1.5% is the cash discount rate. The discount rate is the interest rate used to calculate the future cash flows.

If a customer doesn't use the discount, they are still responsible for the 30-day loan (45 days –15-day discount period). The price of this loan is the cash discount rate.

The business employs 12 30-day intervals, or a 360-day year. 18.27% is the desired annualized rate. Therefore, the 30-day rounded cash discount rate equals 1.5% (18.27% annualised rate divided by 12 30-day periods).

The interest rate that is applied to the projected cash flows of an investment to determine its present value is referred to as the discount rate. It is the rate of return on investment that businesses or investors anticipate. The viability of an investment can be determined by computing the net present value via discounting.

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