Question
Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to
Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 12,000 to 13,200 units during the coming year; the average collection period is expected to increase from 40 to 55 days; and bad debts are expected to increase from 1% to 3% of sales. The sale price per unit is $44, and the variable cost per unit is $32.
The firm's required return on equal-risk investments is 24.5%.
Evaluate the proposed relaxation, and make a recommendation to the firm.
(Note: Assume a 365-day year.)
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