After a stint at Sobeys, you find work at a grocery distributor as a credit analyst. Concerned about deteriorating collection patterns from supermarkets due to grocery theft, the credit manager assigns you to examine the situation. You decide to divide customers into two groups for examination: prompt payers and laggards. Prompt payers, which comprise 80 percent of customers, pay, on average, in 1 month, versus a 3-month average for the laggards. The credit manager wonders if the credit terms should be modified to include a 2 percent cash discount on invoices paid within 10 days. The average invoice is the same for both groups, roughly $5,000. You find that 50 percent of the prompt payers pay in exactly 10 days while the average on the other half slips to 45 days. You also find that 20 percent of the laggards will pay in 10 days and the average on the others improves a little to 2 months as some of the laggards make an attempt to pay within the discount period but fail by a few days. Given your forecasts, the credit manager is not sure that the lost revenue from the discount justifies the improved collection. The companys cost of capital is 12 percent and assume a 30-day month.

a. Given your forecasts, calculate the NPV of the present net 30 terms.

b. Given your forecasts, calculate the NPV of the proposed 2/10, net 30 terms.

c. Should the company adopt the cash discount? What is the intuition for your answer?

d. What factors could change your answer to part c. above? Why?