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.

b. Argo's maintenance service business grosses some $8M per year before discounts and its average days 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?

c. A new client from out of town is quoted $3,300 for a repair. The service people ask you to approve this. You quick check on the client and assess an 5% default risk. What is the NPV of the client? What is the break-even probability? What is the minimum probability of collecting for you to approve the service?

PLEASE SHOW SOLUTIONS

AutoSave O OFF A A 9 . C ... Derrick Hensley_Wk8_MGMT332_Problem Set 8 Q Home Insert Draw Page Layout Formulas Data Review View . Tell me Share Comments A Cut Times New Roman 12 B Wrap Text General Normal Bad Good Neutral X v LG Copy Fill v Paste BIUV Merge & Center v $ ~ % " Conditional Format Calculation Check Cell Explanatory T... Input Insert Delete Format Sort & Find & Analyze Format Formatting as Table Clear v Filter Selec Data Open recovered workbooks? Your recent changes were saved. Do you want to continue working where you left off? Yes No JS Jx B C D E F G H J K M N O P R S T a) Effective Annual Rate (EAR) b) Average Collection Period c) One-Time Client Notional purchase 1,000.00 Gross revenue 8,000,000 Repair cost 3,300 Discount (%) 0.5% Avg. receivables before new policy 547,945 Default probability 5.0% 5 Days difference 16 % paying early 45.0% NPV of client Avg. receivables after new policy Break-even probability Discount ($) 5.00 Change in receivables Extend credit if Rate (%) 0.50% Cost of capital probability of getting Days difference in 1 year 22.81 Projected savings in capital costs paid is higher than 10 minus: discounts 11 EAR 112.1% Projected savings net of discounts 12 Gross margin 13 Gross revenues must rise by: 14 - in dollars 15 - in percent 16 Prob. 1 Prob. 2 V. MAR 2021 + Ready 144%