Mango PLC plans to liberalize its credit policy by extending its current 30 day credit period to 60 days. The company expects that this will increase its current sales of $348, 000 by 30%. Unfortunately, however bad debts are also expected to rise to 5% up from their current level of 2% of the total sales. The company operating cost of 35% of the sales and its credit collection cost of $4, 500 are expected to remain the same. The company is in the 30% tax bracket and it requires all investments to return 10%.

Question

i. Would you advise the company to go ahead with the liberalization plan? Why? Exactly how much richer or poorer will the company be if it relaxes its credit policy?