A company has annual sales of $20 million and all customers are given credit of 60 days. Gross profit on sales is 40%. Currently bad debts are 1.5% of sales. The cost of capital for the company is 10%. Management is concerned about the high level of bad debts and they estimate that by reducing credit terms to 30 days for all customers, bad debts can be reduced to 0.5% of sales. However, total sales revenue is likely to fall by 5% as a consequences of making the credit terms less attractive. Required: Calculate and examine the estimated effect on annual profit of reducing the credit terms from 60 days to 30 days. A company has annual sales of $20 million and all customers are given credit of 60 days. Gross profit on sales is 40%. Currently bad debts are 1.5% of sales. The cost of capital for the company is 10%. Management is concerned about the high level of bad debts and they estimate that by reducing credit terms to 30 days for all customers, bad debts can be reduced to 0.5% of sales. However, total sales revenue is likely to fall by 5% as a consequences of making the credit terms less attractive. Required: Calculate and examine the estimated effect on annual profit of reducing the credit terms from 60 days to 30 days