A credit policy covers how customers qualify for credit, the maximum amount of credit that customers are allowed, the terms of credit sales, and what actions will be taken if customers do not pay on time. To ensure that the credit policy is being followed and that it is achieving the desired objective, it should be monitored. If customers payment patterns change significantly, the firm should consider changing its credit policy.

Which statement best describes whether a proposed change in credit policy should be implemented?

A. A policy that brings the companys average collection period in line with the industry average should be implemented.

B. A policy that reduces the average collection period should be implemented.

C. A policy with the least effect on sales should be implemented.

D. A policy that provides the cash flows with the highest net present value should be implemented.

A new financial manager at Wallace Company has proposed a change to the companys credit policy in order to lower the average collection period of the customers who forgo the discount by five days. The cost of the increased credit effort is $10 million, and the manager estimates that the company will lose 3% in gross sales as a result. The discount customers will not be affected.

Your job is to review the proposal and make a recommendation. To simplify your analysis, assume that sales occur evenly throughout the year, that the variable operating costs and the credit evaluation and collection costs are incurred at the time of sale, and that a 360-day year is used to compute the daily figures. Wallaces cost of capital is 10%.

Complete the following sentences.

Wallace (should/should not) institute the proposed policy change, because the existing policy provides a net present value of ($271/$368/$4,463/$314) compared to the proposed policy, which provides a net present value of ($271/$314/$319/$4,337).

Since this change is expected to have a permanent and continuing effect, this daily difference of ($126/$133/-$43/-$49) will (increase/decrease) the value to the firm by ($478,796/$154,799/$15,478,762/$453,596).

The proposed data, including the daily data, is reflected in the following table. The proposed data, including the daily data, is reflected in the following table