A company with annual sales of $24,000,000 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 34 rather than day 44 as at present (assume a 360 day year) but would decrease their purchases by $450,000 per year. The company also forecasts that its idle cash balance would decrease by $40,000 and administrative costs would be reduced by $35,000 per year. The company's variable costs average 66% of sales, it is in the 35% marginal tax bracket, and it has an 9% 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. A Time Zero Amount Change in AIR balance Profit on change in balance Other W/C change Total Years 1 through infinity Admin costs Bad debt changes Contribution margin Discounts Tax on above Total cash flow Detailed support for above numbers: Detailed support for above numbers: Daily sales Average age of AIR (days) Variable cost Old investment in AIR New daily sales Average age of AIR (days) Variable cost New investment in AIR Net decrease in AIR balance New daily sales Change in average age of AIR (days) Contribution margin Change in AIR based on profit portion Other W/Cchange (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 abo! Net taxable change Tax rate Net change in taxes A company with annual sales of $24,000,000 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 34 rather than day 44 as at present (assume a 360 day year) but would decrease their purchases by $450,000 per year. The company also forecasts that its idle cash balance would decrease by $40,000 and administrative costs would be reduced by $35,000 per year. The company's variable costs average 66% of sales, it is in the 35% marginal tax bracket, and it has an 9% 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. A Time Zero Amount Change in AIR balance Profit on change in balance Other W/C change Total Years 1 through infinity Admin costs Bad debt changes Contribution margin Discounts Tax on above Total cash flow Detailed support for above numbers: Detailed support for above numbers: Daily sales Average age of AIR (days) Variable cost Old investment in AIR New daily sales Average age of AIR (days) Variable cost New investment in AIR Net decrease in AIR balance New daily sales Change in average age of AIR (days) Contribution margin Change in AIR based on profit portion Other W/Cchange (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 abo! Net taxable change Tax rate Net change in taxes
