American Firearms Company is considering a more liberal credit policy to increase sales, but expects that 3 percent of the new accounts will be uncollectible. Collection costs are 4 percent of new sales, production and selling costs are 74 percent, and accounts receivable turnover is four times. Assume income taxes of 25 percent and an increase in sales of $60,000,000. No other asset buildup will be required to service the new accounts.

a. What is the level of accounts receivable to support this sales expansion?

b. What would be AFCs incremental after tax return on investment?

c. Should AFC liberalize credit if a 20 percent after tax return on investment is required? Why or Why not?

Assume that AFC also needs to increase its level of inventory to support new sales and that inventory turnover is three times.

d. What would be the total incremental investment in accounts receivable and inventory to support the $60m increase in sales?

e. Given the income determined in part b, the 20% return requirement from part c, and the investment determined in part d, should AFC extend more liberal credit terms? Why or why not?