A firm currently offers credit terms of 2/10, n/30. You want to change the credit policy to 2/10, n/35. As a result of this change, sales are expected to rise by 15%; bad debts will rise from 1% to 3% of sales. All sales are credit sales.

Currently 30% of customers pay off their accounts in 10 days with 69% paying in 30 days and 1% paying in 100 days. The change will not affect the 30% paying early but is expected to increase the 1% late payers to 3%.

Assume: 365 day year

8% cost of capital

Operating expenses change as a percentage of sales

Taxes are at the 40% rate

Interest expense will drop by $1,000

Income Statement Before credit change
Sales	$200,000
COGS	120,000
Gross Profit	80,000
Bad debts expense	2,000
Operating expenses	40,000
EBIT	38,000
Interest expense	2,000

EBT	36,000
Taxes	14,400
Net Profit	$ 21,600
Before change	Balance Sheet
Cash	$30,000

Accounts Receivable 13,534

Inventory 25,600

After the credit changes, the new net income is projected to be ________.

1. $28,800
2. $26,000
3. $22,860
4. $26,460