Tim Stark is a new accountant with Watts Company. Watts purchased merchandise on account for $9,000. The credit terms are 2/10, n/30. Tim has talked with the company's banker and knows that he could earn 8% on any money invested in the company's savings account.

Instructions

(a) Should Tim pay the invoice within the discount period or should he keep the $9,000 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.

(b) If Tim forgoes the discount, it may be viewed as paying an interest rate of 2% for the use of $9,000 for 20 days. Calculate the annual rate of interest that this is equivalent to.