Question

A company is due to receive a payment of £500,000 from a customer in 6 months’ time. To smooth its cashflows, the company would prefer to receive the payment immediately, and has agreed to transfer its entitlement to this payment to a third party (a discount house) in return for an immediate payment calculated using a rate of commercial discount of 16% per annum. How much will the immediate payment made by the discount house be?

Answer 1

Discount$=16/100*6/12*500000$

$=£ 40 000$

Immediate payment will be

$=500000-40000=460000$

$£460000$