DETERMINING COST EFFECTIVE DISCOUNTS
1. Discounts are only to be taken when the discount rate offered exceeds the Treasury Current Value of Funds Rate. The following conversion formula should be used to convert discount terms to an Effective Annual Discount Rate to be used as a comparison against the Current Value of Funds Rate:
| Discount Percent | Days in Year | ||
| X | |||
| 100 percent minus Discount percent | Number of Days in Payment minus Period (-) | Number of Days in a Discount Period | = Effective Annual Discount Rate |
| Current Value of Funds Rate: | 9 percent |
| Discount Terms: 2 percent / /10 | net 30 |
| .02 360 | |
| X = .36 or 36% | |
| 1.00 - .02 30 - 10 | |
Based on this example, the Effective Annual Discount Rate exceeds the Current Value of Funds Rate, and payment should be made according to the discount terms.
2. This method should be used unless some other method is specified in the purchase agreement.
3. The following list of the more commonly offered discount terms with their corresponding Effective Annual Discount Rate conversions may be used as a ready reference guide:
| Discount Terms | Effective Annual Rate | Discount Terms | Effective Annual Rate |
|---|---|---|---|
| 2/20 net 30 | 72.0 | ||
| 2/10 net 30 | 36.0 | .7/10 net 30 | 12.6 |
| l/20 net 30 | 36.0 | .6/10 net 30 | 10.8 |
| .75/10 net 30 | 1.7 | .55/10 net 30 | 10.1 |
| l/10 net 30 | 18.0 | .5/10 net 30 | 9.0 |
| .5/20 net 30 | 18.0 | .2/20 net 30 | 7.2 |
| .9/10 net 30 | 16.2 | .l/20 net 30 | 3.6 |
| .85/10 net 30 | 15.5 | .l/10 net 30 | 1.8 |
| .8/10 net 30 | 14.4 |
NOTE: The U.S. Treasury notifies agencies of the Current Value of Funds Rate in a Treasury Financial Manual (TFM) bulletin annually. It is, however, subject to quarterly revisions.