In: Finance
Answer all questions. Showing your work may earn you partial
credit.
Proposal #1 would extend trade...
Answer all questions. Showing your work may earn you partial
credit.
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
by $200,000 per year if credit is extended to these new customers.
Of the new accounts receivable generated, 6% are projected to be
uncollectible. Additional collection costs are projected to be 5%
of incremental sales, and production and selling costs are
projected to be 78% of sales. Your firm expects to pay a total of
30% of its income after expenses in taxes.
- Compute the incremental income after taxes that would
result from these projections:
- Compute the incremental Return on Sales if these new
credit customers are accepted:If the receivable
turnover ratio is expected to be 5 to 1 and no other asset buildup
is needed to serve the new customers…
- Compute the additional investment in Accounts
Receivable
- Compute the incremental Return on New
Investment
- If your company requires a 20% Rate of Return on
Investment for all proposals, do the numbers suggest that trade
credit should be extended to these new customers?
Explain.