Question

A firm's current credit terms are 40, and the net present value of the policy is $1,351.96.The firm is considering its policy to 2/15 net 40. Use the data below to complete the problems.

Sales	2,000,000
Change in sales	.04
Discount %	.02
% of customers taking discount	.62
Days in discount period	15
Lag factor	2
Days in net	40
Cost of capital	.032
Bad debt, % of sales	.03
Cost of goods sold, % of sales	.62
G&A, % of sales	623.40
NPV of present policy	1,351.96

What is the present value of daily net sales to discount takers?

a.Between $3,454 and $3,458

b. Between $3,428 and $3,432

c. Between $3,422 and $3,426

d. None of the answers is correct.

2. What are the daily net sales to non-discount takers?

What are the daily net sales to non-discount takers?

a.Between $2,098 and $2,101

b.Between $2,163 and $2,168

c.Between $2,000 and $2,005

d.Nonne of the answers is correct

Answer 1

The frm's current credit terms are 40.

The firm is considering in changing its policy to 2/15, net 40. That essentially means that if the amount is paid in 15 days , a discount of 2% is applicable on it.

We can divide our customers into discount takers and non discount takers

The relevant information to us are the % of customers taking discount

Given that change in sales is .04, the new sales figure is 2,000,000*1.04 = $ 2,080,000

Sales due to discount takers =0.62*2080000 = 1,289,600

Sales due to non discount takers = 0.38*2080000 = $ 790,400

For the discount takers , on applying discount of 2%

The net sales are 1,289,600*(1-0.02) =$1,263,808

The daily net sales to discount takers will then be 1263808/365 = $ 3462.48

The PV of daily net sales would be the discount rate for the period from credit sale to receiving the amount.

That period for dscount takers is a maxmum of 15 days with a lag of 2 days so 15+2 = 17 days

The discount rate is 1+17*COC/365 as COC is an annual figure, we have to convert it to the required period

So the discount rate is (1+17*0.032/365) = 1.00149

So the NPV of discount takers is $3462.48/1.00149 = $ 3,457.33

That is between  $3,454 and $3,458

So Option A

For the non discount takers, the net sales will be the sales to non discount takers net of any bad debt. Given that 0.03 is the bad debt to sales or 3%

then the net sales would be 790400*(1-0.03) = $766,688

the daily net sales to non discount takers then is 766,688/365 = $2,100.51507

That is between $2,098 and $2,101 so OPtion A