Calculate the Annual Effective Rate of your Prompt Payment Discount
If you are able to get a discount by paying your supplier earlier, do you hesitate in doing so? It is always wise to annualize the rate of your prompt payment discount in order to evaluate your opportunity cost.
A prompt payment discount is an opportunity to invest in a company by injecting an amount of money into it prematurely, in order to get a return: the discount. However, this investment could deprive other areas of the business. Annualizing the prompt-pay rate will help you compare its return with your weighted average cost of capital, allowing you to find out whether it's more profitable to invest in the discount allowance or elsewhere in the business.
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Please change the suggested values with your own amounts in the blue text boxes.
