Synthetic Cash Flow Model with Singularity Functions. II: Feasible Prompt Payment Discount Scenarios

Abstract

Accurately comparing balances of normal versus discounted cash flow scenarios is the key for project participants to decide whether to offer or accept a prompt payment discount. Such a decision requires determining what rates and periods are acceptable. These values are calculated through a synthetic cash flow model that uses singularity functions. Singularity functions act upon limited ranges, which is ideal for modeling financial phenomena. A signal function is derived that expresses different payment scenarios and considers the time value of money. Research contributions to the knowledge of body include the following: (1) the model can calculate the balance accurately and efficiently; (2) the new approach evaluates the feasible range for a discount from the views of both payee and payer, which is verified with an engineering economics analysis; and (3) a streamlined process for decision making using new types of nomographs is provided, so that project participants can find mutually beneficial payment arrangements.