Analyzing proposed changes in credit policy

A credit policy covers how customers qualify for credit, the maximum amount of credit that customers are allowed, the terms of credit sales, and what

actions will be taken if customers do not pay on time. To ensure that the credit policy is being followed and that it is achieving the desired objective, it

should be monitored. If customers' payment patterns change significantly, the firm should consider changing its credit policy.

Which statement best describes whether a proposed change in credit policy should be implemented?

A policy should be implemented if the added benefits exceed the costs based on present value.

A policy that provides the lowest bad debts with the least amount of effort should be implemented.

A policy with the least effect on sales should be implemented.

A policy that increases sales volume should be implemented.

A new financial manager at Hansborough Company has proposed a change to the company's credit policy in order to lower the average collection

period of the customers who forgo the discount by $10$ days. The cost of the increased credit effort is $$10$ million, and the manager estimates that the

company will lose $3\%$ in gross sales as a result. The discount customers will not be affected.

The proposed data, including the daily data, is reflected in the following table.

Your job is to review the proposal and make a recommendation. To simplify your analysis, assume that sales occur evenly throughout the year, that

the variable operating costs and the credit evaluation and collection costs are incurred at the time of sale, and that a $360-$day year is used to compute

the daily figures. Hansborough's cost of capital is $10\%.$

Complete the following sentences.

Hansborough

institute the proposed policy change, because the existing policy provides a net present value of

compared to the proposed policy, which provides a net present value of

Since this change is expected to have a permanent and continuing effect, this daily difference of

will

the value to the firm by