22)

Global Services is considering a promotional campaign that will increase annual credit sales by $460,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:

Accounts receivable	5	times
Inventory	4	times
Plant and equipment	5	times

All $460,000 of the sales will be collectible. However, collection costs will be 4 percent of sales, and production and selling costs will be 70 percent of sales. The cost to carry inventory will be 6 percent of inventory. Depreciation expense on plant and equipment will be 5 percent of plant and equipment. The tax rate is 35 percent.

a.	Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together.

Accounts receivable	$
Inventory
Plant and equipment
Total Investment	$

b.	Compute the accounts receivable collection costs and production and selling costs and then add the two figures together.

Collection cost	$
Production and selling costs
Total collection, production, and selling costs	$

c.	Compute the costs of carrying inventory.

Cost of carrying inventory

$

d.	Compute the depreciation expense on new plant and equipment.

Depreciation expense

$

e.	Compute the total of all costs from parts b through d.

Total costs

$

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 12 percent, should it undertake the promotional campaign described throughout this problem?
	Yes No