Hedi, Inc., produces and commercializes battery of cars. To stimulate sales, the financial manager is contemplating lengthening its credit period from the existing net 30 terms to net 40 terms. The credit analyst estimates that the new credit policy increases sales by 10 percent. The financial manager asks you to analyze the impacts of the proposed credit change on the firm's value. The variable costs, as a percent of sales, equal 60%. The existing quarterly sales equal $270 million. The existing bad debt loss rate is 2% and will increase by 0.5% after lengthening the credit period. The existing credit & collection expenses equal 1.5% of sales and those under 40-day terms will be 2.25% of sales. The annual company's cost of capital is presently 10 percent. Under the new credit policy, the firm offers a 2% cash discount if customers pay within 10 days. The percent of sales made to cash discount-takers will be 25%.

1) Calculate the NPV of one day's sales under the existing credit policy.

2) Calculate the NPV of one day's sales under the new credit policy.

3) Do you recommend lengthening the credit period? Why?

4) The Hedi's supplier offers terms of 2/10, net 25 with a late fee of 6% per quarter. You are now re-evaluating your payables policy. Hedi, Inc., has three payment options. The payment could be (0 on or before the cash discount period, (i) on or before the end of the credit period but after the cash discount period, or (i) after the credit period is expired by 5 days. The invoice price represents the half of new sales. Calculate the daily NPV for each alternative. What is your recommendations? Explain.