The Rivera Company, a small retail store, has been in business for a few years. The company's current policy is that all sales are made for cash, and all cash sales are deposited in the company's bank account. The bank account does not pay interest, and the company does not have any temporary investments. Rivera's sales average \(\$ 90,000\) a month, its gross profit is 40 percent, and the average checking account balance is \(\$ 50,000\).

Juan Rivera, the owner, recently hired a consultant to review the company's short-term liquid asset policy. The consultant recommended that Rivera invest its idle cash in temporary investments and accept credit sales. Juan Rivera is investigating the following alternatives.

Temporary Investments

1. Invest in three-month certificates yielding 8.5 percent interest. Early withdrawals from this account will result in the loss of all interest earned.

2. Open an investment account earning 7.5 percent. The minimum amount that can be invested in this account is \(\$ 25,000\), and the bank must be notified seven days in advance for all withdrawals.

3. Open a NOW checking account paying 5.5 percent interest. No notification is required for withdrawals.

Credit Sales

1. Accept credit sales from customers holding a national credit card. One credit card company has offered Rivera a 5 percent service charge rate and will sustain all bad debts losses. If this offer is accepted, it is expected that monthly sales will increase by 15 percent, but 50 percent of the current cash customers will become credit customers.

2. Establish its own credit department. This alternative will require hiring an additional employee at an annual salary of \(\$ 24,000\). Monthly sales are expected to increase by 40 percent, and it is expected that 20 percent of the existing cash customers will become credit customers. It is estimated that bad debts will be 5 percent of credit sales.

Required:

a. Which short-term investment policy should Rivera adopt? Why?

b. Which credit policy should Rivera adopt? Why?