1.ClearWater Inc., owns a water company.This company specializes in high-quality, purified water.Terms currently are net 30 days, which is the industry norm.However, actual payments have been averaging 55 days.In an effort to speed collections, you as the financial manager are considering changing terms to 2/15, net 30.Average annual sales have been $17 million.You believe that this change will actually increase sales to $19.5 million, and that the average collection period will average 30 days (you expect 50% of your customers will take the discount).You have estimated your cost of capital to be 15%.The variable cost ratio is 69% (contribution margin = 31%).

Will the change in terms be a good decision for the company?

Show me how this will affect profitability?

Hint: (1) Calculate the change in profitability caused by the increased sales; (2) calculate the cost of the new discount; (3) Will the balance of A/R increase or decrease and will this be a financial benefit or cost?

Why is the financial ratio Days Sales Outstanding (DSO) so important to a business?

Calculate DSO:Sales revenue = $35,000,000; Average accounts receivable balance =$6,000,000

2.Calculate the AFC of foregoing the cash discount for the following credit terms:

a.2/10, net 30

b.2/10, net 60

c.1/10, net 30