Deni Collectors Ltd.is considering making the following changes in the area of receivables management: Deni Collectors Ltd. could introduce an early settlement discount of 1% for customers who pay within 30 days and at the same time, through improved operational procedures, maintain a maximum average payment period of 60 days for credit customers who do not take the discount. It is expected that 40% of credit customers will take the discount if it were offered.

It is expected that administration and operating cost savings of Sh.595,000 per year will be made after improving operational procedures and introducing the early settlement discount. Bad debts are expected to reduce by Sh. 158,000

Credit sales of Deni Collectors Ltd. are currently Sh.87.6 million per year and trade receivables are currently Sh.18 million. Credit sales are not expected to change as a result of the changes in receivables management. The company has a cost of

short-term finance of 6 % per year.

Required

i.Calculate and comment on whether the proposed changes in receivables management will be acceptable. (2 Marks)

ii.Assuming that only 40% of customers take the early settlement discount, what is the maximum early settlement discount that could be offered? (2marks)

C) Borrowing has No effect on the value of the firm in a world without taxes, Discuss. (10 marks)