1. ABC FBO sells maintenance services to various private jet operators. For these, it demands payment within 30 days. It is considering changing this policy to 1.25% / 8, net 30. What is the implicit annual rate in the new policy? Use a notational purchase of $1000

1. ABC maintenance service business grosses some $10 million per year before discounts in its average days receivable is 30. If 25% of his clients opt to follow the new policy, what will be the change in receivables? If ABCs W ACC is 8% what are the projected savings of the new policy? If its gross margin is 20%, by how much will gross dollar revenues have to rise to offset the loss from discounts? In percent?

E D b) Average Collection Period 10,000,000 25.0% A B 1 a) Effective Annual Rate (EAR) 2 3 Notional purchase 1,000.00 4 Discount (%) 1.25% 5 Days difference 30 6 7 Discount ($) 8 Rate (%) 9 Days difference in 1 year 10 11 EAR 12 8.0% Gross revenue Avg. receivables before new policy % paying early Avg. receivables after new policy Change in receivables Cost of capital Projected savings in capital costs minus: discounts Projected savings net of discounts Gross margin Gross revenues must rise by: - in dollars - in percent 20.0% 13 m A w 14 15 E D b) Average Collection Period 10,000,000 25.0% A B 1 a) Effective Annual Rate (EAR) 2 3 Notional purchase 1,000.00 4 Discount (%) 1.25% 5 Days difference 30 6 7 Discount ($) 8 Rate (%) 9 Days difference in 1 year 10 11 EAR 12 8.0% Gross revenue Avg. receivables before new policy % paying early Avg. receivables after new policy Change in receivables Cost of capital Projected savings in capital costs minus: discounts Projected savings net of discounts Gross margin Gross revenues must rise by: - in dollars - in percent 20.0% 13 m A w 14 15