B5. (Changing credit policies) Conn Music Company is considering a new credit policy that has much more stringent credit standards. Sharon Conn estimates that the new policy will affect several key variables as shown here. Assume that the cost of goods sold is a cash outlay at time zero and that the expected sales (net of bad debt) are collected at the end of the collection period. Which policy is better?

CURRENT POLICY PROPOSED POLICY

Annual sales $15 million $14 million

Cost of goods sold/Sales 72% 72%

Bad debt/Sales 4% 2%

Collection period 2 months (0.1667 years) 1 month (0.08333 years)

Required return 15% 15%