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1. A firm's annual sales revenue is 800 million lira. Current credit policy of the firm: Current credit period is 90 days. 12 %
1. A firm's annual sales revenue is 800 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 90th day, and 20% of the customers pay on 120 day. The firm's cost ratio (excluding depreciation) is 65 %. Credit analysis and collection expenses are 12 million lira. 3% of sales are never collected that means bad debt losses are expected to be 24 million lira. The firm is considering a new credit policy. Proposed credit policy of the firm: I Credit period will be 120 days. Annual sales are expected to be 900 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 120th day, 15 % of the customers pay on 140th day. The firm's cost ratio (excluding depreciation) is again 65 %. Credit analysis and collection expenses are expected to be 6 million lira. It is expected that 5 % of sales will never be collected that means bad debt losses will be 45 million lira. Firm's cost of capital is 18 %. Required: Analyze two credit policies. Which one do you choose? Why? (6 Points)
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