Dickson City Company has annual sales of $5 million, while the cost of goods sold is $3.2 million. All sales are made on a cash basis. The owner of Dickson has come up with the plan of giving credit to the customers. He believes that this will increase the sales by 25% without increasing any of the fixed costs. He thinks that 20% of the customers will pay within 30 days, 40% within 60 days, 37% within 90 days, and 3% of the customers will default on the sales. The cost of capital to Dickson is 12%.

(A) Should Dickson City introduce the policy of credit sales?

Answers: NPV(cash) = $1.8 million, NPV(credit) = 1.941 million, yes.

(B) The manager of the firm doubts whether the sales will actually increase by 25% as a result of this strategy. Find the minimum increase in sales to justify introduction of the new credit policy.

Answer: 15.29%