Formula and Calculator for Discounts
If a vendor has offered a discount, use this calculator to decide if it is economically sound to accept a discount that a vendor offers.
If the effective annual discount rate is larger than the current value of funds rate, accept the discount and pay early.
If the effective annual discount rate is smaller than the current value of funds rate, reject the discount and pay as close to the payment due date as possible.
In the first three boxes, put in the numbers for your situation. The current rate is already in the fourth box. When you click on Calculate, the page refreshes with the answer in the box below the Calculate button with the label: Effective annual discount rate.
A vendor offers a 2 percent/10 net 30 discount, and the vendor submitted the invoice 6 days ago. You would enter these numbers in the calculator:
Discount the vendor is offering: .02
(turning the percentage into a decimal by dividing it by 100)
Total days in the payment period: 30
(days to pay before payment is late)
Days left in the discount period 4
(10 days in total discount period minus the 6 days since the invoice was submitted.)
The box for current value of funds rate already has the current value.
After you click Calculate, the system brings back the effective annual discount rate. For this example, with the current value of funds rate of 1% (.01), the result is .0283- larger than the .01 current value of funds rate.
Taking the discount this vendor is offering will save the government money. Therefore, you should pay now at the discounted rate.