Question
Ali Corporation presently gives credit terms of net 30 days. It has $60 million in credit sales, and its average collection period is 40 days.
Ali Corporation presently gives credit terms of net 30 days. It has $60 million in credit sales, and its average collection period is 40 days. To stimulate demand, the company may give credit terms of net 45 days. If it does instigate these terms, sales are expected to increase by 10%. After the change, the average collection period is expected to be 55 days, with no difference in payment habits between old and new customers. Variable costs are $0.80 for every $1 of sales, and the companys before-tax required rate of return on investment in receivables is 15%. Should the company extend its credit period? (Assume a 360-day)
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