1. A firms annual sales revenue is 400 million lira.

Current credit policy of the firm:

Current credit period is 90 days. 12 % of the customers pay cash and take 5 % cash discount, 65 % of the customers pay on 90^th day, and 20% of the customers pay on 120^th day. The firms cost ratio (excluding depreciation) is 70%. Credit analysis and collection expenses are 6 million lira. 3 % of sales are never collected that means bad debt losses are expected to be 12 million lira.

The firm is considering a new credit policy.

Proposed credit policy of the firm:

Credit period will be 120 days. Annual sales are expected to be 450 million lira. New cash discount is 10 %. It is expected that 20 % of the customers pay cash and take the discount. It is expected that 60 % of the customers pay on 120^th day, 15 % of the customers pay on 140^th day. The firms cost ratio (excluding depreciation) is again 70%. Credit analysis and collection expenses are expected to be 3 million lira. It is expected that 5 % of sales will never be collected that means bad debt losses will be 22.5 million lira.

Firms cost of capital is 16 %.

Required: Analyze two credit policies. Which one do you choose? Why?