Both the supplier and its customers are short of funds due to a severe credit squeeze imposed by the Government and the banks. In order to attract customers, however, the supplier considers offering one month’s credit rather than the existing terms of cash on delivery. Existing sales are €10,000 per month, and the supplier anticipates an increase in sales to €12,000 per month from the new credit policy. The supplier forecasts that a third of all future sales will be on credit with half on one month’s credit and the other half on two months’ credit. The expected incremental service costs of the new credit policy total €100 per month, and the gross margin on sales is 50% of the sales price. The company had borrowed funds at 10%. Due to the current credit squeeze, however, offering additional credit requires forgoing profitable projects promising returns of 20%

compared with the required rate of return of 15%. Management thinks that the new credit policy is of the same risk as these other projects. Can the supplier expect the new policy to be profitable?