A new financial manager at Wallace Company has proposed a change to the company's 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 $10 million, and the manager estimates that the company will lose 3% in gross sales as a result. The discount customers will not be affected. The proposed data, including the daily data, is reflected in the following table. Existing Policy Proposed Policy I. General Credit Policy Information Credit terms 2/10 net 30 46.0 days 10.0 days 50.0 days 2/10 net 30 41.5 days 10.0 days 45.0 days (Average collection period (ACP) for all customers ACP for customers who take the discount (10%) ACP for customers who forgo the discount (90%) II. Annual Credit Sales and Costs ($ milllions) Credit sales Amount paid by discount customers Amount paid by nondiscount customers $1,600 $189 $1,440 $1,629 $1,336 $0.0 $160 $1,552 $189 $1,392 $1,581 Net credit sales $1,296 $0.0 Variable operating costs (82% of net sales) Bad debts Credit evaluation and collection costs III. Daily Credit Sales and Costs ($ thousands) $170.00 Net credit sales $4,525 Amount paid by discount customers Amount paid by nondiscount customers Variable operating costs (82% of net sales) Credit evaluation and collection costs $525 $4,000 $3,711 $444 $4,392 $525 $3,867 $3,600 $472 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. Wallace's cost of capital is 10% $314 $314 $271 $368 $319 $4,463 Should or should not $271 Complete the for s entences. Wallace institute the proposed policy change, cause the existing policy provides a net present value of compared to the proposed policy, which provides a net present value of $4.337 Since this change is expected to have a permanent and continuing effect, this daily difference of will the value to the firm by -$43 decrease $453,596 $126 increase $478,796 -$49 $154,799 $133 $15,478,762 A new financial manager at Wallace Company has proposed a change to the company's 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 $10 million, and the manager estimates that the company will lose 3% in gross sales as a result. The discount customers will not be affected. The proposed data, including the daily data, is reflected in the following table. Existing Policy Proposed Policy I. General Credit Policy Information Credit terms 2/10 net 30 46.0 days 10.0 days 50.0 days 2/10 net 30 41.5 days 10.0 days 45.0 days (Average collection period (ACP) for all customers ACP for customers who take the discount (10%) ACP for customers who forgo the discount (90%) II. Annual Credit Sales and Costs ($ milllions) Credit sales Amount paid by discount customers Amount paid by nondiscount customers $1,600 $189 $1,440 $1,629 $1,336 $0.0 $160 $1,552 $189 $1,392 $1,581 Net credit sales $1,296 $0.0 Variable operating costs (82% of net sales) Bad debts Credit evaluation and collection costs III. Daily Credit Sales and Costs ($ thousands) $170.00 Net credit sales $4,525 Amount paid by discount customers Amount paid by nondiscount customers Variable operating costs (82% of net sales) Credit evaluation and collection costs $525 $4,000 $3,711 $444 $4,392 $525 $3,867 $3,600 $472 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. Wallace's cost of capital is 10% $314 $314 $271 $368 $319 $4,463 Should or should not $271 Complete the for s entences. Wallace institute the proposed policy change, cause the existing policy provides a net present value of compared to the proposed policy, which provides a net present value of $4.337 Since this change is expected to have a permanent and continuing effect, this daily difference of will the value to the firm by -$43 decrease $453,596 $126 increase $478,796 -$49 $154,799 $133 $15,478,762