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Clothing Ltd. sells apparel and accessories in retail outlets with all of their clients utilising store credit due to the favourable terms offered. Currently, the
Clothing Ltd. sells apparel and accessories in retail outlets with all of their clients utilising store credit due to the favourable terms offered. Currently, the company has sales of R90m per annum with a gross profit margin of 50% while offering favourable repayment terms of 120 days to make payment with no interest charged and bad debts amounting to 8% of sales leading to a current days sales outstanding (DSO or ACP) of 150 days. The financial manager of the company wants to change the terms to 10/30 net 80, which she expects will drive the DSO down to 70 days but increase bad debts to 10% of sales. It is also expected that the discount on offer for early payment will lead to sales increasing to R100m if the terms were adopted. The company can invest excess funds in short term securities at a rate of 10% per annum. Assume a 365-day year. Determine the effect of the change in credit terms and advise Clothing Ltd on the feasibility of the new terms
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