Discounted Cash Flow Analysis
Discounted Cash Flow vs IRR
Discount Payment Period (DPP) Definition
The Discount Payment Period (DPP) refers to the period of time in which a payment on a purchase can be made for a discount incentive. A DDP can lead to advantages for both sides of the transaction. On one side, if the buyer makes the payment during the DDP, the buyer saves money and drives down costs. On the other side of the coin, by giving a discount based on an incentive to complete transactions earlier, the seller turns over the business cycle by receiving cash for the accounts receivable earlier than normal. As one can see, both parties benefit from utilization of the Discount Payback Period.
Discounted Payback Period Example
For example, Raincorp., housed in San Francisco, makes a purchase of merchandise from a different company, Dynamerch. The payment of the sale is due in 30 days with interest incurred afterward. During this sale, Dynamerch informs Raincorp that they will implement a Discount Payback Period. If Raincorp makes the payment in under 10 days, then a 2% discount will be deducted from the actual payment amount. If the payment is made in less than 5 days, then 6% will be deducted from the actual payment amount.
Raincorp makes the payment to Dynamerch in 4 days; therefore, Raincorp will receive a 6% discount on the merchandise payments they owe to Dynamerch.
Discounted Payback Period Explanation
The way in which the Discount Payment Period (DPP) is organized is very simple. The invoice that is given to the buyers is in a specific notation. This notation is interpreted in two very simple ways. In the example above, the notation for the discount would look like this: 2/10, 6/5, n/30. As said before, it is not very difficult to interpret these invoice short-hands.
For the first two notations, the first number represents the percentage discount that is to be given to the buyer upon completion of the incentive package.
The second number represents the number of days in which the discount package can be completed.
The third notation used is no more difficult than the first.
The only change occurs in the first character, the “n” is short for “net,” meaning that the net amount for the purchase is due on this date. In this case, the net amount is due 30 days from the date of the purchase.