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Sue Cole is a new accountant with Oriole Company. Oriole purchased merchandise on account for $7,200. The credit terms are 1/10, n/30. Sue has talked with the company's banker and knows that she could earn 6% on any money invested in the company's savings account.
Problem (a) Should Sue pay the invoice within the discount period or should she keep the $7,200 in the savings account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best.
Problem (b) If Sue forgoes the discount, it may be viewed as paying an interest rate of 4% for the use of $7,200 for 20 days. Calculate the annual rate of interest that this is equivalent to.
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