Current Terms (E) Proposed Terms Option (N) Terms Net 30 1/10, Net 30 Sales Growth Rate (g) 15% Annual Credit Sales $1,000,000 $1,150,000 Daily Credit Sales (S) $2,739.73 $3,150.68 Cash Discount Offered -% (d) 1% Customers Taking Discount -% (p) 40% DSO - Discount Takers (DP) 12 DSO- Non-Discount Takers (CP) 40 40 Variable Cost Ratio (VCR) 80% No Change Collection/Credit Exp (EXP) at CP 2.50% 1.50% Bad Debt Expense Ratio (b) at CP 7.50% 5.00% Annual Cost of Capital (k) 10% No Change Ze = SE(1-depe(1-be)/(1+ iDPE) + SE(1-PE)(1-be)/(1 + iCPE) VCR (SE) EXPE(S)/(1 + iCPE) - - Zn = [(1+g)S/(1-d)p(1-bx)/(1 + iDP) + [(1+g)Se](1-PN)(1-by)/(1 + iCPN) VCR[(1+g)SE] EXP[(1+g)]/(1 + iCP) Assuming the NPV of the existing policy is $247, should the firm accept the proposed policy? Why? No, because Z is lower No, because Z is higher Yes, because Z is lower Yes, because Z is higher Current Terms (E) Proposed Terms Option (N) Terms Net 30 1/10, Net 30 Sales Growth Rate (g) 15% Annual Credit Sales $1,000,000 $1,150,000 Daily Credit Sales (S) $2,739.73 $3,150.68 Cash Discount Offered -% (d) 1% Customers Taking Discount -% (p) 40% DSO - Discount Takers (DP) 12 DSO- Non-Discount Takers (CP) 40 40 Variable Cost Ratio (VCR) 80% No Change Collection/Credit Exp (EXP) at CP 2.50% 1.50% Bad Debt Expense Ratio (b) at CP 7.50% 5.00% Annual Cost of Capital (k) 10% No Change Ze = SE(1-depe(1-be)/(1+ iDPE) + SE(1-PE)(1-be)/(1 + iCPE) VCR (SE) EXPE(S)/(1 + iCPE) - - Zn = [(1+g)S/(1-d)p(1-bx)/(1 + iDP) + [(1+g)Se](1-PN)(1-by)/(1 + iCPN) VCR[(1+g)SE] EXP[(1+g)]/(1 + iCP) Assuming the NPV of the existing policy is $247, should the firm accept the proposed policy? Why? No, because Z is lower No, because Z is higher Yes, because Z is lower Yes, because Z is higher