Ghazal Company currently makes all sales on credit and offers no cash discount. The firm is considering
Question:
Ghazal Company currently makes all sales on credit and offers no cash discount. The firm is considering offering a 2 percent cash discount for payment within 15 days. The firm's current average collection period is 60 days, sales are 40,000 units, selling price is US$45 per unit, and variable cost per unit is US$36. The firm expects that the change in credit terms will result in an increase in sales to 42,000 units, that 70 percent of the sales will take the discount, and that the average collection period will fall to 30 days. If the firm's required rate of return on equal risk investments is 25 percent, should the proposed discount be offered?
Step by Step Answer:
Principles of Managerial Finance
ISBN: 978-1408271582
Arab World Edition
Authors: Lawrence J. Gitman, Chad J. Zutter, Wajeeh Elali, Amer Al Roubaix