Question

In: Finance

The Tradition Corporation is considering a change in its cash-only policy. The new terms would be...

The Tradition Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 1.2 percent per period. Current Policy New Policy Price per unit $ 50 $ 52 Cost per unit $ 30 $ 30 Unit sales per month 2,000 2,125 Calculate the NPV of the decision to change credit policies. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Solutions

Expert Solution

Solution:

Assumption:

It has been assumed that one period here refers to one month.

Summary:

In the above answer, since the present value of net amount realized,i.e., profit earned by the corporation in the new policy is higher than that in the current policy, the company should go ahead with the new policy.

The extra profit that it would make in today's value by implementing the new policy = $ (46,195.65 - 40,000) = $ 6,195.65.

Required return for one period has been used as the discounting rate for that period.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

The Snedecker Corporation is considering a change in its cash-only policy. The new terms would be...
The Snedecker Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 2.5 percent per period. Current Policy New Policy Price per unit $ 59 $ 61 Cost per unit $ 33 $ 33 Unit sales per month 2,450? What is the break-even quantity for the new credit policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Fahmi Enterprise has a cash-only sales policy. It is considering changing to a credit policy of...
Fahmi Enterprise has a cash-only sales policy. It is considering changing to a credit policy of net 30 days. Information related to the current and new policies is given in the table below. The required rate of return is 0.75 percent per month. Current Policy New Policy Price per unit (RM) 15.00 15.50 Cost per unit (RM) 8.00 8.40 Unit sales per month 2,000 2,050 Perform an analysis to show whether or not Fahmi Enterprise should adopt the new policy?
A company is considering switching from a cash only policy to a net 30 credit policy....
A company is considering switching from a cash only policy to a net 30 credit policy. The price per unit is $750 and the variable cost per unit is $650. The company currently sells 1,900 units per month. Under the proposed policy the company expects to sell 2,000 units per month. The required monthly return is .5%. If you were using NPV analysis to decide whether the company should switch to the net 30 credit policy, what amount would you...
Excellence Corporation follows a moderate current asset investment policy, but it is now considering a change,...
Excellence Corporation follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed policy. The firm’s annual sales are $500,000; its fixed assets are $180,000; its target capital structure calls for 40% debt and 60% equity; its EBIT is $64,000; the interest rate on its debt is 14%; and its tax rate is 40%. With a restricted policy, current assets will be 18% of sales, while under a...
Management at Firm X is considering switching from terms of cash only sales to trade credit...
Management at Firm X is considering switching from terms of cash only sales to trade credit terms of net 30 days, in an effort to increase sales. The table below shows projected financial information for the proposed trade credit terms and current cash terms. Based on this information, calculate the Trade Credit Value Added associated with the change in trade credit policy and make a recommendation. Assume that the first transaction would occur today, followed by monthly sales in perpetuity....
Buchholz Corporation follows a moderate current asset investment policy, but is now considering a change, perhaps...
Buchholz Corporation follows a moderate current asset investment policy, but is now considering a change, perhaps to a restricted or maybe to a relaxed policy. The firm's annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $50,000; the interest rate on debt is 8%; and its tax rate is 25%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy,...
Buchholz Corporation follows a moderate current asset investment policy, but is now considering a change, perhaps...
Buchholz Corporation follows a moderate current asset investment policy, but is now considering a change, perhaps to a restricted or maybe to a relaxed policy. The firm's annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $40,000; the interest rate on debt is 8%; and its tax rate is 25%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy,...
A corporation is considering a new issue of convertible bonds. Management believes that the offer terms...
A corporation is considering a new issue of convertible bonds. Management believes that the offer terms will be found attractive by 20% of all its current stockholders. Suppose that this belief is correct. A random sample of 130 current stockholders is taken. a. What is the standard error of the sample proportion who find this offer attractive? b. What is the probability that the sample proportion is more than 0.15? c. What is the probability that the sample proportion is...
Blueroot Inc. is considering a change in its financing policy. Currently, it uses maximum trade credit...
Blueroot Inc. is considering a change in its financing policy. Currently, it uses maximum trade credit by not taking discounts on its purchases. The standard industry credit terms offered by all its suppliers are 2/10 net 30 days, and the firm pays on time. The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking discounts. The firm wants to determine the effect of this policy change on its net income. Its net purchases are...
QUESTION 3 (5 Marks) Fahmi Enterprise has a cash-only sales policy. It is considering changing to...
QUESTION 3 Fahmi Enterprise has a cash-only sales policy. It is considering changing to a credit policy of net 30 days. Information related to the current and new policies is given in the table below. The required rate of return is 0.75 percent per month. Current Policy New Policy Price per unit (RM) 15.00 15.50 Cost per unit (RM) 8.00 8.40 Unit sales per month 2,000 2,050 Perform an analysis to show whether or not Fahmi Enterprise should adopt the...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT