FINANCE

Use the following information for questions 1-3.

Your firms CFO has tasked you with evaluating the net present value associated with changing the firms trade credit terms from net 30 days to net 45 days. Other pertinent assumptions include:

Annual sales with existing credit terms = $5,000,000

Variable cost ratio with existing credit terms = 30% of revenues

Costs of collections with existing credit terms = 1% of revenues

Bad debt expense ratio with existing credit terms = 2% of revenues

Annual sales with new credit terms = $5,500,000

Variable cost ratio with new credit terms = 30% of revenues

Costs of collections with new credit terms = 1% of revenues

Bad debt expense ratio with new credit terms = 3% of revenues

Discount rate = 10%

1)What is the daily net present value of the current trade credit policy? Assume that the variable costs are paid upfront while the costs of collections occur when the payment is received from the customer.

2)What is the daily net present value of the new trade credit policy? Assume that the variable costs are paid upfront while the costs of collections occur when the payment is received from the customer.

3)What is the aggregate increase in net present value from making this change to trade credit policy?

4)What is the optimal cash discount percentage with the following financial situation: Cash discount period=10 days, credit period=30 days, and annual cost of capital=22%.

5)Besley Inc., manufactures and sells wallboard for use in construction of modular homes. It sells on net 30 terms to contractors. Following are the last 6 months sales and the A/R balances at the end of June, the present (report) month. Calculate the uncollected balance percentages for this company.

Accounts Receivable Schedule; June 30

Month*	Credit Sales	Uncollected Amount
January	$ 75,000	$ 5,000
February	50,000	5,000
March	100,000	6,000
April	40,000	6,000
May	45,000	8,000
June	50,000	12,000
	June 30 A/R balance	$42,000

* assume all months have 30 days

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