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A company with annual sales of $ 2 2 , 0 0 0 , 0 0 0 is considering changing its payment terms from net

A company with annual sales of $22,000,000 is considering changing its payment terms from net 40 to net 30 to encourage customers to pay more promptly. The company forecasts that customers would respond by paying on day 32 rather than day 44 as at present (assume a 360 day year) but would decrease their purchases by $400,000 per year. The company also forecasts that its idle cash balance would decrease by $80,000 and administrative costs would be reduced by $30,000 per year. The company's variable costs average 62% of sales, it is in the 35% marginal tax bracket, and it has an 8% cost of capital.
Required:
A. Calculate the incremental cash flows associated with accepting this proposal, and organize your cash flows into a cash flow spreadsheet of the type demonstrated in chapter 12 of the textbook.
B. Calculate the proposal's Net Present Value.
C. Calculate the proposal's Internal Rate of Return.
D. Calculate the proposal's Net Annual Benefit.
E. Explain whether the firm should shorten its payment terms or not.
Your answers to this problem should be placed in the space below this line.
A Time Zero Amount Years 1 through infinity
Change in A/R balance Admin costs
Profit on change in balance Bad debt changes
Other W/C change Contribution margin
Total Discounts
Tax on above
Total cash flow
Detailed support for above numbers:
Daily sales
Average age of A/R (days)
Variable cost %
Old investment in A/R
New daily sales
Average age of A/R (days)
Variable cost %
New investment in A/R
Net decrease in A/R balance
New daily sales
Change in average age of A/R (days)
Contribution margin %
Change in A/R based on profit portion
Other W/C change (given in problem)
Change in administrative costs (given in problem)
Decrease in sales
Contribution margin %
Net decrease in contribution margin
Change in admin costs (from above)
Change in contribution margin (from above)
Net taxable change
Tax rate
Net change in taxes
B Present value of cash inflows
Present value of cash outflows
Net present value
C Annual cash outflow
Investment in A/R
Internal rate of return
D Allowed annual cost
Actual annual cost
Net annual benefit
E Double click and put your answer here.

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