Cash discount is given to buyers to bring them to make prompt payment. The credit terms identify the percentage discount and the period throughout which it is obtainable. Liberal cash discount policy implies that either the discount percentage is raised or the discount period is raise. This leads to improved sales, reduce in average collection period and increase in cost. The consequence of this on net profit can be estimate through the equation 3.
?NP = [? S (1 - V ) - ?DIS ] (1 - t ) + k?I
Here I = Savings in receivables investment
? DIS = Increase in discount cost
? I = S0/360 (ACP_{n} - ACP_{0}) - V (ACP_{n})( ?S/360)
? DIS = P_{n }(S_{0} +?S) d_{n} - P_{0}S_{0}d_{0}
Here P_{n} = Proportion of discount sales after liberalizing the discount terms.
S_{0} = Sales before liberalizing the discount terms
? S = raise in sales
d_{n} = New discount percentage
P_{0} = Proportion of discount sales before liberalizing the discount terms
d_{0} = Old discount percentage