A new financial manager at the Hansborough Company has proposed a change to the companys credit policy to lower the average collection period (ACP) of the customers who forgo the discount by ten days The cost of the increased credit effort is $10 million, and the manager estimates that the company will lose 6 in gross sales as a result The discount customers will not be affected The proposed data, including the daily data, is reflected in the following table Existing Policy Proposed Policy I General Credit Policy Information Credit terms 2 10 net 30 2 10 net 30 Average collection period (ACP) for all customers 46 0 days 37 0 days ACP for customers who take the discount (10 ) 10 0 days 10 0 days ACP for customers who forgo the discount (90 ) 50 0 days 40 0 days II Annual Credit Sales and Costs Credit sales $170,000 $159,800 Amount paid by discount customers (net discount) $16,660 $16,660 Amount paid by nondiscount customers $153,000 00 $142,800 Net credit sales $169,660 $159,460 Variable operating costs (82 of net sales) $139,121 20 $130,757 Bad debts $0 0 $0 0 Credit evaluation and collection costs $17,000 $17,010 III Daily Credit Sales and Costs Net credit sales $465 $437 Amount paid by discount customers (net discount) $46 $46 Amount paid by nondiscount customers $419 $391 Variable operating costs (82 of net sales) $381 $358 Bad debts $0 0 $0 0 Credit evaluation and collection costs $47 $47 Your job is to review the proposal and make a recommendation To simplify your analysis, assume (1) that sales occur evenly throughout the year (2) that the variable operating costs and the credit evaluation and collection costs are incurred at the time of sale and (3) that a 365 day year is used to compute the daily figures Hansboroughs cost of capital is 7 5 Complete the following sentences Hansborough should not institute the proposed policy change, because the existing policy provides $13,539 in daily cash flow, which has at a net present value (NPV) of , compared to the proposed policy, which provides in daily cash flow, with a net present value of will Since this change is expected to have a permanent and continuing effect on Hansborough, then this daily difference of the value of the firm by

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A new financial manager at the Hansborough Company has proposed a change to the companys credit policy to lower the average collection period (ACP) of

A new financial manager at the Hansborough Company has proposed a change to the companys credit policy to lower the average collection period (ACP) of the customers who forgo the discount by ten days. The cost of the increased credit effort is $10 million, and the manager estimates that the company will lose 6% in gross sales as a result. The discount customers will not be affected.

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

	Existing Policy	Proposed Policy
I. General Credit Policy Information
Credit terms	2/10 net 30	2/10 net 30
Average collection period (ACP) for all customers	46.0 days	37.0 days
ACP for customers who take the discount (10%)	10.0 days	10.0 days
ACP for customers who forgo the discount (90%)	50.0 days	40.0 days

II. Annual Credit Sales and Costs
Credit sales	$170,000	$159,800
Amount paid by discount customers (net discount)	$16,660	$16,660
Amount paid by nondiscount customers	$153,000.00	$142,800
Net credit sales	$169,660	$159,460
Variable operating costs (82% of net sales)	$139,121.20	$130,757
Bad debts	$0.0	$0.0
Credit evaluation and collection costs	$17,000	$17,010
III. Daily Credit Sales and Costs
Net credit sales	$465	$437
Amount paid by discount customers (net discount)	$46	$46
Amount paid by nondiscount customers	$419	$391
Variable operating costs (82% of net sales)	$381	$358
Bad debts	$0.0	$0.0
Credit evaluation and collection costs	$47	$47

Your job is to review the proposal and make a recommendation. To simplify your analysis, assume: (1) that sales occur evenly throughout the year; (2) that the variable operating costs and the credit evaluation and collection costs are incurred at the time of sale; and (3) that a 365-day year is used to compute the daily figures. Hansboroughs cost of capital is 7.5%.

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Complete the following sentences: Hansborough should not institute the proposed policy change, because the existing policy provides $13,539 in daily cash flow, which has at a net present value (NPV) of , compared to the proposed policy, which provides in daily cash flow, with a net present value of will Since this change is expected to have a permanent and continuing effect on Hansborough, then this daily difference of the value of the firm by