2. Question 2 consists of parts a. b, and c - a. Argo sells maintenance services to various private jet operators. For these. it demands payment within 20 days. Argo is considering changing this policy to 0.5%!4, net 20. What is the implicit effective annual rate in this payment policy? Use a notional purchase of $1.000. Argo's maintenance service business grosses some $3M per year before discounts and its average davs receivable is 25 {unlike the overall business where this number is --15}. If 45% of Argo's clients opt to pay earlier and get the 0.5% discount. what will be the change in the service business's receivables? If Argo's cost of capital is 5.5%. what are the projected savings of this change in policy? If Argo's gross margin is 25%. by how much will gross dollar revenues have to rise to offset the loss from discounts? In percent? A new client from out of town is quoted $3,300 for a repair. The service people ask vcu to approve this. You do a quick check on the client and assess an 5% default rislt. What is the l~lF"vIr of the client? What is the break-even probability? What is the minimum probability of collecting for you to approve the service? A B C D E F G H a) Effective Annual Rate (EAR) b) Average Collection Period c) One-Time Client N P 3 Notional purchase Gross revenue Repair cost 4 Discount (%) Avg. receivables before new policy Default probability 5 Days difference % paying early NPV of client 6 Avg. receivables after new policy Break-even probability 7 Discount ($) Change in receivables Extend credit if 8 Rate (%) Cost of capital probability of getting 9 Days difference in 1 year Projected savings in capital costs paid is higher than 10 minus: discounts 11 EAR Projected savings net of discounts 12 Gross margin 13 Gross revenues must rise by: 14 - in dollars 15 - in percent 16 17