18 HW3

Global Services is considering a promotional campaign that will increase annual credit sales by $540,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: Accounts receivable Inventory Plant and equipment 4 times 8 times 2 times All $540,000 of the sales will be collectible. However, collection costs will be 5 percent of sales, and production and selling costs will be 74 percent of sales. The cost to carry inventory will be 4 percent of inventory. Depreciation expense on plant and equipment will be 15 percent of plant and equipment. The tax rate is 25 percent. a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together. Answer is complete and correct. Accounts receivable $ Inventory Plant and equipment 135,000 67,500 270,000 472,500 Total Investment $ b. Compute the accounts receivable collection costs and production and selling costs and then add the two figures together. Answer is complete and correct. Collection cost $ 27,000 Production and selling costs Total collection, production, and selling costs 399,600 426,600 $ c. Compute the costs of carrying inventory. Answer is complete and correct. Cost of carrying inventory $ 2,700 f. Compute income after taxes. Income after taxes g-1. What is the aftertax rate of return? (Input your answer as a percent rounded to 2 decimal places.) Aftertax rate of return % g-2. If the firm has a required return on investment of 10 percent, should it undertake the promotional campaign described throughout this problem? Yes