Here is one formula that might help.

This calculates the approximate annual cost to a buyer of not taking a discount and paying at net terms.

Discount Cost = D / (1

! D" # $%& / (' ! T"

(here D = Discount )ercentage ' = 'et )eriod T = Discount )eriod

*n example might be if a buyer is offered +, 1 'et $ day terms. (hat is the cost of paying at 'et $ days rather than taking a +, discount and paying in 1 days. -f you use this formula and substitute +, 1 net $ terms. the Discount Cost /ill be $0.+$,

Compare the Discount Cost to the buyers opportunity cost (or cost to borro/ the funds". -f the cost to borro/ the funds is less than the Discount Cost. it indicates the buyer should borro/ the money and pay the in1oice in the discount days.

2ou /ould need to calculate the present 1alue of the transaction using more than one collection scenarios and compare the outcomes.

Here is the formula for the present 1alue of a collection /here discount terms are used3

)resent 4alue of 5eceipt at end of Discount )eriod = 6Total of 7ull )ayment # (1 8 Discount 5ate"9 / 61 : (Days in Discount )eriod # *nnual ;pportunity Costs / $%&"9

Here is the formula for the present 1alue of a collection /ithout a discount3

)resent 4alue of 5eceipt at end of 'et )eriod = 6Total of 7ull )ayment9 / 61 : (Days in 'et )eriod # *nnual ;pportunity Costs / $%&"9

<oth formulas result in a dollar 1alue. The difference bet/een the t/o 1alues is the difference in dollars the seller experiences based on their cost of borro/ing. <y playing /ith the Discount 5ate and Days in Discount )eriod. you can determine a discount rate and number of days /here the t/o formulas result in the same present 1alue.