After looking at all the data, Beth decides to only consider Alternatives 1 and 2. She decides that the 2/10, net 30 cash discount could increase credit sales by $1 million. The 1/10, net 30 is assumed to have no impact on sales. Assume a 9 percent before tax profit margin on the new sales.* Also assume the 2 percent cash discount must be subtracted. Further, assume the new sales will require a new investment in accounts receivable of $27,750. These funds could earn 20% if invested elsewhere. (The 20% is return on investment, whereas the 9% referred to above is return on sales.

* You do not have to include taxes for any of the calculations in this case.

Under the new set of facts, is the 2/10, net 30 policy now superior to the 1/10, net 30 policy?

Take the profitability computed for the 2/10, net 30 policy in Question 7, and add to that the increased profitability (9% return minus costs) detailed above. Compare your new total answers for the profitability of the 2/10, net 30 policy to the answer for the 1/10, net 30 policy in Question 7.

Which policy should the firm choose?

Table 1. Accounts Receivables Outstanding, December 20XX Table 2. New Terms for Cash Discounts