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.