Peter O'Toole is a new accountant with First Step Company. First Step purchased merchandise on account for $18000. The credit terms are 2/10 n/30. Peter has talked with the company's banker and knows that he could earn 5% on any money invested in the company's savings account.
Instructions
(a) Should Peter pay the invoice within the discount period or should he keep the $18000 in the money market account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best.
(b) If Peter forgoes the discount it may be viewed as paying an interest rate of 2% for the use of $18000 for 20 days. Calculate the annual rate of interest that this is equivalent to.

Question

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The Answer of Peter O'Toole is a new accountant with First Step Company. First Step purchased merchandise on account for $18000. The credit terms are 2/10 n/30. Peter has talked with the company's banker and knows that he could earn 5% on any money invested in the company's savings account.
Instructions
(a) Should Peter pay the invoice within the discount period or should he keep the $18000 in the money market account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best.
(b) If Peter forgoes the discount it may be viewed as paying an interest rate of 2% for the use of $18000 for 20 days. Calculate the annual rate of interest that this is equivalent to.

Peter O'Toole Is a New Accountant with First Step Company