Question

In: Finance

Global Services is considering a promotional campaign that will increase annual credit sales by $520,000. The...

Global Services is considering a promotional campaign that will increase annual credit sales by $520,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:  
  

Accounts receivable 4 times
Inventory 8 times
Plant and equipment 4 times

     
All $520,000 of the sales will be collectible. However, collection costs will be 3 percent of sales, and production and selling costs will be 72 percent of sales. The cost to carry inventory will be 8 percent of inventory. Depreciation expense on plant and equipment will be 5 percent of plant and equipment. The tax rate is 30 percent.

a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together.
  

    

b. Compute the accounts receivable collection costs and production and selling costs and then add the two figures together.
  

   

c. Compute the costs of carrying inventory.
  

   

d. Compute the depreciation expense on new plant and equipment.
  

     

e. Compute the total of all costs from parts b through d.
  

   

f. Compute income after taxes.
  

   

g-1. What is the aftertax rate of return? (Input your answer as a percent rounded to 2 decimal places.)
  

    

g-2. If the firm has a required return on investment of 12 percent, should it undertake the promotional campaign described throughout this problem?
  

Yes
No

Solutions

Expert Solution

a)

Investments
Particulars Amount
Accounts receivables Sales / Accts receivable turnover = $520,000 / 4 = $130,000
Inventory Sales / inventory turnover = $520,000 / 8 = $65,000
Plant and Equipement Sales / P&E turnover = $520,000 / 4 = $130,000

b) Accounts receivable collections costs = 3% of sales = $520,000 x 3% = $15,600

Production and selling costs = 72% of sales = $520,000 x 72% = $374,400

Total = $15600 + $374400 = $390,000

c) Cost of carrying inventory = 8% of inventory = 8% x $65000 = $5200

d) Depreciation = 5% of plant and equipment = $130,000 x 5% = $6500

e) Total costs = $390,000 + $5200 + $6500 = $401,700

f) Income after taxes = (Sales - Total costs) x (1 - tax rate) = ($520,000 - $401,700) x (1 - 0.30) = $82,810

g-1) After tax rate of return = Income after taxes / Sales = $82,810 / $520,000 = 0.1593 or 15.93%

g-2) Yes, the investment should be undertaken since after tax return of 15.93% is greater than required return of 12%.


Related Solutions

Global Services is considering a promotional campaign that will increase annual credit sales by $630,000. The...
Global Services is considering a promotional campaign that will increase annual credit sales by $630,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:      Accounts receivable 5 times Inventory 8 times Plant and equipment 3 times       All $630,000 of the sales will be collectible. However, collection costs will be 4 percent of sales, and production and selling costs will be 74 percent of sales. The cost to...
Global Services is considering a promotional campaign that will increase annual credit sales by $540,000. The...
Global Services is considering a promotional campaign that will increase annual credit sales by $540,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:      Accounts receivable 4 times Inventory 8 times Plant and equipment 2 times       All $540,000 of the sales will be collectible. However, collection costs will be 5 percent of sales, and production and selling costs will be 74 percent of sales. The cost to...
Global Services is considering a promotional campaign that will increase annual credit sales by $460,000. The...
Global Services is considering a promotional campaign that will increase annual credit sales by $460,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: Accounts receivable 5 times Inventory 4 times Plant and equipment 5 times All $460,000 of the sales will be collectible. However, collection costs will be 4 percent of sales, and production and selling costs will be 70 percent of sales. The cost to carry inventory...
global services is considering a promotional campaign that will increase annual credit sales by $570,000 the...
global services is considering a promotional campaign that will increase annual credit sales by $570,000 the company will require investments in accounts receivable, inventory, and plant and equipment. the turnover for each is as follows: accounts receivable... 3x inventory... 6x plant and equipment... 1x all $570,000 of the sales will be collectible. However, collection cost will be 3 percent of sales, and production and selling costs will be 70 percent of sales. The cost to carry inventory will be 6...
Global Services is considering a promotional campaign that will increase annual credit sales by $650,000. The...
Global Services is considering a promotional campaign that will increase annual credit sales by $650,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:      Accounts receivable 2 times Inventory 4 times Plant and equipment 2 times       All $650,000 of the sales will be collectible. However, collection costs will be 6 percent of sales, and production and selling costs will be 76 percent of sales. The cost to...
Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $688,000....
Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $688,000. The company has a 40% cost of goods sold and will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:   Accounts receivable 5x   Inventory 8x   Plant and equipment 2x    All $688,000 of the sales will be collectible. However, collection costs will be 4 percent of sales, and production and selling costs will be 79 percent...
Boswell’s Greenhouse is considering a promotional campaign, if successful, that would increase annual credit sales by...
Boswell’s Greenhouse is considering a promotional campaign, if successful, that would increase annual credit sales by $700,000. To accomplish that, Boswell will have to invest in accounts receivable, inventory, and plant and equipment. The turnover in each of those areas is 6x, 6x, and 2x, respectively. All $700,000 in additional sales will be collectible—but at an expense of 3% of sales. Production and selling costs will be 75% of sales. The cost to carry inventory will be 5% of inventory....
Monarch King Size Beds Ltd. is evaluating a new promotional campaign that could increase sales. Possible...
Monarch King Size Beds Ltd. is evaluating a new promotional campaign that could increase sales. Possible outcomes and probabilities of the outcomes are shown below. Possible Outcomes Additional Sales in Units Probabilities Ineffective campaign 60 0.60 Normal response 100 0.20 Extremely effective 120 0.20 Compute the coefficient of variation. (Round the final answer to 2 decimal places.) Coefficient of variation
1. Please describe global product development process 2. How to plan a promotional campaign?
1. Please describe global product development process 2. How to plan a promotional campaign?
Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that...
Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 10 percent of the new accounts will be uncollectible. Collection costs are 5 percent of new sales, production and selling costs are 79 percent, and the accounts receivable turnover is five times. Assume income taxes of 30 percent and an increase in sales of $84,000. No other asset buildup will be required to service the new accounts.   a. What additional investment in accounts receivable...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT